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

Market commentary - as at February 2017

Despite continued uncertainties around Trump’s policies and European politics, coupled with rising expectation of a March rate hike by the US Fed, risky assets including Asian credits have a strong month of performance as volatility remained subdued. JACI returned a positive 1.41% as spreads tightened by 8 bps to end the month at 223bps while US treasury rallied with the 10 year yield ending the month 6 bps lower at 2.39%. Both investment grade and high yield performed well with the latter outperforming (1.7% vs 1.34%) as it continues to be favored as market’s expectation is still for US rates to head higher over time. Spread returns were largely positive across all markets except negligible declines in India and South Korea. Top performers for the month were Mongolia (1.73%) and Sri Lanka (0.64%).

At its first meeting for 2017, the US Federal Reserve Open Market Committee (FOMC) left the official Fed Funds target rate unchanged at 0.5%-0.75%. The decision was largely expected by markets and is consistent with expectations that the Fed will wait for more insight into any potential fiscal stimulus coming from Trump. Overall, the Fed gave an upbeat assessment on the US economy. During the month, investors were keenly awaiting development of two events. President Trump’s highly anticipated address to Congress and comments from the FOMC on 1 March. The former did little to move markets as Trump’s address turned out to be much ado about nothing, failing to provide further clarity on tax policies. However, the latter had a notable impact as key US Federal Reserve members convinced markets that a rate hike in March was likely.

Over in Asia, central banks from South Korea, Indonesia, Philippines and Thailand all kept their policy rate unchanged amid benign inflation and uncertainty over Trump’s policies. We sense that there is a general cautiousness towards what subsequent rate hikes in the US will do to Asian currencies. This inaction also affirmed our belief that rate cut cycle is effective over in Asia barring a major downturn in the regional economies.
New issuance in Asia was very robust with a total of USD12.99b printed. Demand remained very strong despite market expectations that US interest rate will rise through the course of the year. China was once again the largest issuer, accounting for 67% of supply. This was followed by Hong Kong and Korea, each accounting for 8%. We also saw a significant increase in high yield issuance, accounting for 32% of total supply following a barren spell for a large part of 2016. There was yet again several mega issues which included China Development bank (US$2B), Bank of China (US$2B), ICBC (US$2B), Huawei (US$1.5B), Korea Development Banks(US$1.5B), Citic limited (US$1.25B) and Hong Kong government (US$1B Sukuk) all of which were very well received.

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