A monthly review of the Asian Credit Market.

Market Commentary - as at August 2019

August will be best remembered as a month mired with uncertainties. We have the tit-for-tat retaliations between China and the US which continues to weigh on sentiments. Probability of a no deal Brexit further exacerbated the negative mood in the markets. Renminbi convincingly breached the key 7 handle for the first time in more than ten years, causing much volatility in Asian currencies. On top of that, an inversion of the US treasury curve led to more investors worrying about the state of the global economy as recession now looks imminent in the months ahead. As the risk-off mode went into full swing across risky assets, JACI spreads were not spared widening by 19bps to end the month at 279bps. Nevertheless, total return was positive at 1.48% all thanks to the remarkable rally in US treasuries as market started pricing in rate cuts by the Fed in the coming months. Investment grade bonds outperformed high yield with return of 2.22% vs a negative 0.94% for the latter. By country, spreads return were largely negative with frontier markets including Pakistan, Sri Lanka and Mongolia underperforming by the most. Hong Kong corporates also had a tough month as protest in the territory continued to turn more violent without any signs of abating.

During the month, China announced key interest rate reforms to help steer borrowing costs lower amid a slowing economy. Under the new mechanism, bank lending rates will be linked to the loan prime rate, which will be in turn linked to the People Bank of China’s medium term lending facility interest rate. What this means is that in future when policy interest rate falls, loan interest rate will fall too. One thing to note is this liberalization focuses only on the lending rate while the deposit rate was left untouched. Outside of China, we witnessed a series of rate cuts by other Asian central banks from Indonesia, India, Thailand and Philippines. Even though Bank of Korea was on hold during the month, they signaled clearly that they are open for further easing. Most of the above mentioned central banks’ rhetoric suggest that their cuts were preemptive, in view of the deteriorating global outlook and uncertainty. Nevertheless, data released in recent months seem to suggest that domestic demand in many Asian economies is clearly on a weakening trend. For instance India, a domestic demand driven economy delivered a Q1 GDP growth at only 5%, the lowest in 25 quarters and the first time since March 2013 that growth has been sub-6% for two consecutive quarters.

Amid the weak sentiments, new issues activity declined significantly during the month with total issuance at USD 8.7b which was 70% lower than the month before. Nevertheless, this brought year-to-date issuance to USD 193b which is still a robust 55% higher than the same period last year. Some notable deals included Sinopec’s USD 2b three-tranche deal, which was announced right after the Fed’s rate cut announcement. The deal received a healthy demand of USD 4.3b worth of order. Meanwhile, Singtel issued USD 750m of 10-year senior unsecured bonds which was very well received by investors with an order size that is 3.6x of issue size.


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