A monthly review and outlook of the Asian Quality Bond market.
Market review - as at June 2017
Asian credit market had a relatively quiet month trading in a moderately narrow range until towards the end of the month when commentary from the President of the European Central Bank (ECB) provided a reminder of the future path towards tighter monetary policy. The market reacted accordingly with a spike in global government bond yields despite President Draghi making it clear any movements would be measured and gradual and dependent on continued economic recovery.
JACI returned a positive 0.21% on the back of a modest spread tightening in investment grade bonds, while US treasury return was flat. High Yield spreads were dragged wider following the larger than expected mega issue by property developer Evergrande. The negative sentiments in high yield were further exacerbated by reports that China Banking Regulatory Commission (CBRC) probed into offshore M&A lending activities of property developers including Fosun and Dalian Wanda. By country, spread returns were largely positive with the exception of Indonesia, Mongolia and Sri Lanka. Pakistan and Vietnam led the pack with the best performance.
Sticking to the gradual tone, the US Federal Open Market Committee (FOMC) raised the Fed Funds target rate by a further 25bp to a 1.0%-1.25% range at its June meeting. The market was expecting the hike, pricing in a 98% probability ahead of the meeting. The FOMC kept the outlook largely unchanged with a third hike in 2017 and three more in 2018 still in the plans. This continues to be a much faster acceleration than the market believes, as pricing indicates a notably flatter rate path over the coming years (cumulating at around 150bps lower). Nevertheless, it’s likely the Fed will be focusing on the balance sheet unwind at its next meeting in September.
Continuing the talk of normalisation, the Bank of England turned more hawkish than expected at its early June meeting with three of eight members calling for an immediate hike in rates. This came on the back of a strong inflation print despite the contrasting slow wage growth. While rates remained unchanged, the surprise change in sentiment caused Sterling to rally. The latter was much needed following the currency’s earlier pounding following the unsuccessful snap election gamble by PM Teresa May where the Conservatives failed to win an outright majority. Sentiments in the UK was further impacted by two unrelated terror attacks in Manchester and London during the month.
Issuance activity picked up in June with a total of US$22.8b printed, a 31% increase over the previous month. This brings year to date supply to USD 152b, an astounding 104% increase over the same period last year. There were yet again several mega issues including Evergrande (US$6.6b), Kaisa (US$3.9b), Baidu (US$1.5b) and China State Construction (US$1b). High yield issuance has picked up significantly this year, providing this segment of the market with much needed liquidity which has been sorely lacking.
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