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

Market review - as at December 2017

Asian credit market was largely stuck in a range with spreads almost unchanged despite some optimism arising from the US passing a tax plan and a dovish and largely anticipated Fed rate hike. JACI returned 0.17% with gains coming mainly from coupons received. This gain brought year to date return to 5.78%, impressive when we in the uncertainties we faced throughout the year including Fed’s rate hikes, Trump protectionist stance and geo-political tension between the US and North Korea. Returns by country were mostly positive during the month with frontier markets Mongolia and Pakistan leading the pack.

As widely expected, the US Fed hiked policy rate for the 3rd time bringing the Fed fund rate from 1.25% to 1.5%. The rate hike was predicated around solid job gains with unemployment falling further despite inflation still well below the Fed’s target of 2%. Going forward, the Fed is expecting to see moderate growth with labor market remaining strong. The FOMC median estimates show 3 hikes in 2018 and two in 2019, while the estimate of longer run Fed fund rate remaining at 2.8%.

Following the Fed’s hike, the People’s Bank of China (PBOC) to market’s surprise hiked 1 year medium-term lending facility (MLF) and reverse repo rates by 5bps. While the hike is smaller than the usual 10bps moves during January and March, it is a signal that PBOC wants to keep the renminbi stable. We do not see this as a hawkish signal as PBOC commented that money market rates are already high. This is evidenced by the muted reaction from the market following the hike.

New issuance activity slowed in December though at USD 17.8b it is still one of the busiest December in recent years. Chinese issuers accounted for 69%, followed by Indonesia at 23% and India at 8%. For the full year, total fixed rate issuance hit USD 271b, a 56% increase year over year.


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