A monthly review and outlook of the Asian Quality Bond market.

Market review - as at August 2017

Asian credit market was largely in a defensive mode amid rising geopolitical tension with North Korea defiantly launching missiles including one that flew right over Japan. Investors are also seen patiently awaiting development around fiscal reform in the US as the debt ceiling deadline approaches. Despite the heightened uncertainty, markets generally held up well with only modest spread widening seen. JACI delivered yet another month of positive return of 0.94% mainly due to the strong rally in US treasury where we see the 10 year treasury yield falling 18bps to end the month at 2.12%. JACI spreads meanwhile widened by 4 bps to 237bps. Investment grade lagged high yield return at 0.89% vs 1.10%. August’s return brings year to date performance to an impressive 5.36%.

There were no major central banks’ policy changes during the month though many were left disappointed as talks of tapering and balance sheet reductions were notably absent. Fed Chairman Yellen and European Central Bank (ECB) President Draghi were cautiously optimistic in their speeches but fell short of saying anything hawkish. Economic data announced during the month suggest that economic growth remains strong globally while labor markets in the US continue to see gains. There remains little evidence of an acceleration in wages or inflation data.

Over in Asia, Bank Indonesia (BI) cut its policy rate by 25bps to 4.50% though consensus was expecting a hold. The cut was meant to spur growth amid a disinflationary environment where BI expects inflation to come in at around 4% this year and 3.5% the next. BI also mentioned that external risks have subsided, as the Fed interest rate hikes and balance sheet reduction are now likely smaller and will come later than expected.

Notwithstanding the cautious mood, new issuance supply in August remained robust at a total of USD13.7b. This was dominated largely by high yield and bank seniors paper accounting for almost 73% of issuance. By country, China continues to lead the pack with 46% of issuance, followed by Indonesia at 19% and India at 14%. Year to date supply is now 66% higher than that in 2016 and looks well on its way to yet another record year for new issuance. Most notably, high yield supply has made a strong comeback, a major trend for a big part of this year.


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