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

Market review - as at October 2017

Sentiments in Asian credit was strong throughout the month despite higher US treasury yields and several key events taking place that include ECB’s announcement of its QE plan and the China party Congress. There were some profit taking in Chinese SOEs post the sovereign issuance but nevertheless spread for both IG and HY ended the month at a post crisis tight. JACI returned a positive 0.43% for the month largely due to the spread tightening which more than offset the higher US Treasuries yield. This brought year to date gain at an impressive 5.79%. Both IG and HY returned positively in October at 0.34% and 0.73% respectively. By country, all spread returns for the month were positive with the exception of Pakistan. Mongolia and Sri Lanka stood out once again as the top performers.

ECB announced during the month they will extend the asset purchase program (APP) for another nine months from January at a reduced monthly rate of €30 bn. This widely anticipated decision represents the second step in the gradual exit from the APP after last December´s decision to reduce the monthly asset purchases from €80 bn to €60 bn starting from April 2017. However, Draghi chose to leave the APP open-ended, without specifying an end date to this program much to the surprise of many investors. This affirms our belief that the Fed, ECB and BoJ will all cohesively wind down their own quantitative programs in an extremely gradual manner, boding well for asset prices.

Towards the end of the month, we had the most anticipated issuance as China sold its first sovereign USD bond since 2004. The 5 year bond was priced at 15bps over Treasuries while the 10 year was priced at 25bps above. Both bonds each have an issue size of USD1b. The sale followed the conclusion of the Communist Party congress where President Xi Jinping cemented his status as China’s strongest leader in decades. Xi has a three-decade vision of turning China into a leading global power, with a plan to deepen China’s economic ties with Asia, Europe, and Africa through a global infrastructure initiative. The issuance will help establish a benchmark for pricing foreign currency bonds from China, effectively lowering the funding costs for SOEs and other government related entities. Total issuance for the month remained robust at USD 20.7b, bringing year to date supply to 48% higher than the same period last year.


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