Asian Quality Bond Monthly Review and Outlook

Market commentary - as at April 2017

Monetary policy and US political uncertainty took a back seat in April as geopolitical risks and the first round of the French election were the focus during the month. Rising tensions between the US and North Korea over missile testing and the US retaliation on Syria’s chemical weapons dominated headlines. The uncertainty largely led to a risk-off tone in Asian credit markets early in the month. This was partly reversed later in the month after the first round of the French election, which saw some of the risks around the political situation in Europe dissipate. The highly anticipated tax reforms in the US left markets trying to decipher the potential impact but currently appear lacking in details.

JACI returned a positive 0.51% on the back of the rally in US treasuries which more than offset the credit spreads widening. US 10 year treasury yield ended the month 10bps lower at 2.28%b while the JACI spread widened by 7bps to 228bps. Investment grade underperformed high yield yet again on a spread basis even though both posted positive total returns. Spread returns by countries were mixed. Frontier markets including Vietnam, Mongolia and Pakistan all witnessed tighter spreads, outperforming rest of the universe where spreads widened.

Globally, monetary policy remained unchanged for the month starting with the Reserve Bank of Australia (RBA) which held rates steady at 1.50%. The European Central Bank retained its easing bias but pointed to a more solid growth story than in 2016. The Bank of Japan also kept monetary policy steady but raised its GDP growth forecast. Whilst the US Federal Open Market Committee did not meet in April, Federal Reserve (Fed) Chair Yellen reiterated that the pace of rate hikes will remain gradual and that there was no appetite within the Fed to rapidly increase rates.

Since the start of the year, we witnessed a strong uptick in Asian exports and improving PMIs and this trend looks set to continue. Exports data released during the month from South Korea and Singapore were very encouraging, leading to their respective central banks keeping policy rates unchanged while maintaining a cautiously optimistic outlook. During its monetary policy meeting, Bank of Korea (BoK) left the policy base rate unchanged at 1.25% while raising their 2017 GDP and CPI forecasts by 10bp each to 2.6% and 1.9% respectively. BoK expects the recovery to build momentum in 2018, forecasting next year’s growth at 2.9% with CPI steady at 1.9%. Against the backdrop of a higher than expected growth but a still uncertain outlook, Monetary authority of Singapore (MAS) maintained status quo at the semi-annual monetary policy review as widely expected by the market. They maintained a zero appreciation slope, with no change in midpoint or policy band. MAS has reduced the S$NEER slope incrementally since 2015 and adopted a zero appreciation slope since Apr-16.

Supply continues to be robust with another USD23.9b of fixed rate issues printed in April bringing year to date supply to 93% higher year on year. Chinese issuance dominated yet again accounting for 85% of this month’s supply, though what is more significant is the increase in Chinese high yield since the start of the year amid stricter onshore access and this is expected to continue in the coming months.

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