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

Market commentary - as at March 2017

Asian credit market eked out a positive performance during a month that saw credit spreads trading on a firm tone while US treasuries were almost unchanged despite exhibiting some volatility intra-month. The 2nd rate hike by the US Federal Reserve (the Fed) within 3 months accompanied by a relative dovish statement was a huge relief for the market, while many post-election Trump trades continued to fade after the House Republicans failed to garner enough votes to repeal Obamacare. JACI returned a positive 0.23% as spreads tightened by 2bps to end the month at 221bps while US treasuries were largely unchanged despite the 10 year trading back and forth the bounds of the recent 2.3-2.65% range. Both investment grade and high yield performed well with the latter outperforming (0.39% vs 0.19%) yet again, which has been a trend for the past few quarters. Spread returns were largely positive across all markets except in Malaysia, following withdrawals of ratings on 1MDB bonds by S&P. Top performers by country were Indonesia and Mongolia.

After a very slow start to its monetary policy normalization process, with only one rate hike in both 2015 and 2016, the Fed entered a new and more active phase for monetary policy. Through the combination of good economic data and rising inflation, the Fed raised the Fed Fund target rate by a further 25bp to a new 0.75%-1.0% range. However, the Fed statement was little changed from recent months, with no change to the Fed’s own expectations for the future path of monetary policy, i.e. the ‘dots’ for 2017 remained at three rate hikes in total, i.e. two more to come this year.

On 27th March, S&P withdrew its ratings on the two outstanding scandal stricken 1MDB bonds. This follows Moody’s action to withdraw their ratings on the bonds back in June 2016. S&P cited the termination of the ratings engagement contract as the reason for the withdrawal of rating, while Moody’s previously cited business reasons. Despite being laden with scandals, S&P treated the wording of the letter of support for the bonds akin to a guarantee by the Malaysia sovereign. Nevertheless, the removal of the ratings led to significant spread widening as this means investors who requires a rating for their bond holdings will not be able to participate in these bonds and may even be forced sellers.

Despite anxiety around the Fed rate hike, we witnessed yet another robust month of issuance with total supply coming in at USD34.5b. Bank senior papers accounted for USD12.8b of supply and we also saw high yield corporates making a long awaited return to the market. By country, the leaders were China (65%), Indonesia (11%) and Hong Kong (10%). There were yet again several mega issuance including China Cinda USD3b, Indonesia sovereign sukuk USD3b and ZheShang Bank USD2.2b. The strong and steady issuance since the start of the year brought year to date supply to 38% above that for the same period in 2016.



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