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

Market commentary - as at May 2017

May turns out to be an eventful month during which we have two sovereign rating changes, strong new issuance activity and some idiosyncratic risks emerging around some commodities related names most notably Noble group. Nevertheless, overall tone of the market remained firm with spreads still very much stuck in a tight range. JACI returned a positive 0.49% on the back of the rally in US treasuries while spreads return was a small negative. US 10 year treasury yield ended the month 8bps lower at 2.20% while the JACI spread widened by 4bps to 232bps. Investment grade reversed its long spell of underperformance versus high yield delivering a positive return of 0.76% while the latter was down 0.5%. By country, most countries registered modest return while the largest detractors were Hong Kong -1.9% (largely due to Noble group), Philippines -0.3% and India -0.26%.

After being on hold for the past few years, S&P finally raised Indonesia’s sovereign rating to investment grade BBB- with a stable outlook from the previous rating of BB+. Following this revision, Indonesia has now acquired investment grade rating from all the three major rating agencies, i.e. S&P, Moody’s and Fitch. S&P is now of the view that net government debt will remain below 30% of GDP. The agency is also complimentary of Bank Indonesia’s (BI) ability to attenuate financial shocks, increase exchange rate flexibility and commitment to inflation targeting. The increasing reliance on market based instruments in conducting monetary policy has been viewed as a significantly positive development. Lastly, the narrowing of the current account deficit and moderation of inflation were also viewed as positive developments. Later in the month, Moody’s downgraded China’s credit rating by one notch from Aa3 to A1. This is unsurprising as the rating agency had China’s outlook at negative for the past 14 months. Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.

Supply slowed modestly in May with a total of USD 17.4b printed. This is 13% lower year over year and 39% lesser than April. Nevertheless, year to date supply at USD 125b is 91% higher than the same period last year. During the month, we witnessed several Hong Kong perpetual bond issues amounting to USD 6.3b. This included Cheung Kong Property, Sun Hung Kai and NanFung. PLN (USD 2b) and Sri Lanka Sovereign were the other issues of notable size.


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