Asian Bond Market, February figures and outlook
Deze inhoud is voorbehouden aan professionele beleggers in de zin van de MiFID-richtlijn.
by Marcus Weston, CFA, Fixed Income Senior Portfolio Manager, JK Capital Management Ltd., a La Française group-member company
It was a soft month for Asian USD bonds in February as a sharp steepening of the US Treasury bond yield curve pushed cash prices lower, particularly for long duration paper. While investment Grade spreads did remain largely stable throughout the month and high yield debt saw modest gains, this was not sufficient to offset the underlying curve weakness. The US Government 10-year bond ended the month yielding 1.41% an increase of 34bps compared with the level at the end of January, hitting a 1 year high of 1.53% intra-month. Given short-term rates remained unchanged, this increase was almost fully on account of curve steepening with long duration bonds particularly underperforming. In fact, the 2yr to 30yr yield spread of 210bps has reached its highest premium since 2015 in the past week.
Undoubtedly, inflation concerns have been the main catalyst of the recent curve move with CRB food and industrial metal price indices spiking during the month, hitting multi-year highs in both cases. Similarly, energy prices, as indicated by the Brent crude oil price, jumped 20% in February returning to pre-COVID levels. Given these commodity price gains appear to be largely fuelled by global inventory restocking as western consumers see greater optimism of a post COVID economic rebound, the sustainability of this trend likely remains highly dependent on the success of global vaccine rollouts and suppression of new virus infections. However, while the timing of this virus progression may remain uncertain, clearly less ambiguous is central bank reaction to the latest moves as Fed Chairman Powell on February 24th reiterated his intention to maintain loose monetary policy and QE support for market liquidity. This, in combination with President Joe Biden’s aggressive push of his fiscal agenda, should keep current positive growth drivers in place and corresponding pressure on both the UST and USD markets in the near term.
Within Asian IG bond markets, relative performance last month largely reflected duration as long maturity sectors such as Indonesia/Philippines sovereigns, Malaysian/Thai Energy companies and Chinese internet names all saw the biggest declines. Perhaps the one exception was Chinese state oil company CNOOC which helped by the positive oil price move saw a strong rebound in its bonds after weakness in Dec and Jan following the US investment ban. High Yield Bonds outperformed IG although relative performance within HY was mixed as Pakistan, Mongolia and India/Indonesia commodity companies all outperformed while perennial high beta play, Sri Lanka, was once again the biggest drag on the market. Meanwhile within China HY the dominant property sector ended the month broadly flat as high coupon gains across the sector were offset by weakness in a handful of names such as Greenland (GRNLGR), Sichuan Languang (LGUANG) and Rise Sun (Rissun) which experienced softening investor sentiment following the China Fortune Land (CHFOTN) default.
In terms of macro fundamentals, the next major focus for the Asian bond market will be corporate earnings season as most regional companies (with the exception of India) report their full year results in March. 2H20 results will give a strong indication on the level of recovery Asian corporates achieved after regional economies reopened following the 1H20 COVID lockdown and whether the strong macro numbers translated into similarly strong performance at the micro level. Separately, for the China property sector it will also be the first chance to observe progress made in improving balance sheets after the introduction of the ‘three red lines’ leverage policy last year.
Meanwhile, inflation numbers both in and out of Asia will need to be closely observed in March to see the extent recent commodity price spikes have translated into CPI and PPI reports while, as always, COVID case numbers and vaccine rollout progress will be key to predicting the sustainability of this recent sentiment driven rally.
Typically, after Chinese new year, the Asian USD bond market sees a significant pick up in new issue volumes, however given the recent sharp increase in long dated treasury yields, this has clearly negatively weighed on issuer sentiment and supply has so far remained lackluster over this period. The longer this continues this may have a corresponding effect on the market as investor demand for a smaller availability pool of new paper should positively impact credit spreads. In our view this should remain favorable for risk positioning down the credit curve, albeit remaining in short duration exposures.