A monthly review and outlook of the Asian Quality Bond market.
Market review - as at January 2018
Risky assets got off to a flying start with equity markets making new highs while credit rallied towards pre crisis tights. The bullish sentiments were only dampened towards the end of the month as developed market rates edged higher on expectations of more aggressive rate hikes by the Fed along with a normalising of ultra-easy monetary policies by the European Central Bank (ECB). Despite spreads tightening by almost 10bps during the month, JACI returned a negative 0.52% as the loss in US treasuries more than offset the gain coming from spreads tightening. The 10 year US treasury yield increased by 30bps to end the month at 2.71% while JACI blended spread ended the month at 213. Investment grade bonds returned a negative 0.74%, underperforming high yield which delivered a positive 0.25%. This is largely due to the higher interest rate sensitivity of investment grade bonds. Spreads return by country were all positive led by frontier markets including Mongolia, Pakistan and Sri Lanka as sentiments towards emerging markets and frontiers remained highly positive.
The ECB started its asset purchase program tapering this month and minutes from their December meeting (released mid-January) were more hawkish than expected with discussions turning towards the end of the asset purchasing program and potential rate hikes thereafter. In the US, policy rates remained unchanged after the January Federal Open Market Committee (FOMC) meeting but the accompanying statement was interpreted as being slightly more hawkish. The FOMC was more positive on employment, household spending and investment and noted that core inflation is no longer declining with expectations it will stabilise around the 2% objective over the medium term. The Bank of Japan (BOJ) left monetary policy unchanged in the month was expected by markets and offered an upbeat view on inflation. However, some speculation on rate control was introduced at month end when the BOJ increased its monthly bond purchases by JPY30 billion, the first increase since September 2017.
New issuance in Asia remains very strong as we witnessed a total of USD31.7b supply during the month, which is 53% higher year over year. China accounted for 65% of supply while India and Philippines made up another 9%. High yield issuance registered an extremely strong month with USD12b of new issues, considering that total supply for 2017 was only USD75b.
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