After the frenzy of new issues in January, we expect market activity will slowdown in February as we approach the Chinese New Year break. Furthermore, the recent stabilization of the UST yield curve has likely removed urgency for Asian corporates to rush their bond issuance.
This should bring some much needed relief for the Asian bond market which is beginning to show signs of primary market indigestion.
With Trump political volatility now somewhat out of the picture, we expect more traditional macro signals to re-emerge as the key drivers for the bond market. In other words, attention will focus back to the interplay of the economy and fiscal/monetary policy. In this regard, COVID remains the greatest sensitivity and clearly much of the COVID vaccine optimism at the start of the year appears to have been premature as cases continue to soar while vaccine rollouts disappoint. While this may pause the recent curve steepening trend, we believe higher UST yields and USD weakness is inevitable given Biden will still want to push forward his fiscal agenda while he maintains control of the Senate and House.
In the Asian region, the key consideration regarding COVID will be the extent to which the Chinese authorities’ suppression of people movement over the Chinese new year holiday creates a headwind on consumption demand. We are already starting to see some sensitive sectors such as tourism and retail names trade cautiously ahead of the holidays although it is the property sector that will inevitably have the biggest impact on our markets. That said, last year property names demonstrated incredible resilience as recent announcements of full year sales suggest, companies were able still to achieve impressive growth despite lockdowns. In our view, as demand for the sector remains robust it will continue to be government policy that drives bond performance and while recent tightening measures, such as the new three-red-line rule, may raise some concerns on volatility, this is ultimately positive for the stability of the sector, in our view. It is very telling that despite the recent sharp drop in the bonds of large scale issuer CHFOTN, we have not yet seen this translate into a major sell off across the rest of the sector indicating Chinese property bonds remain attractive to domestic investors.
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