Credit markets are expected to have another positive year. We expect economic growth in Asia to be stable but see some potential downside risks. In Europe, political risk remains high for 2017. Some of our key themes are: hybrid bonds, financials, oil/emerging markets and High Yield.
2016 was a year of surprises. The Federal Reserve (Fed) backtracked on its outlook on interest rate hikes, Britain voted to leave the European Union, Italian Prime Minister Matteo Renzi resigned after a resounding defeat in the Italian referendum, and Donald Trump triumphed over Hillary Clinton to become the 45th US President. Commodities rallied, owing partly to low base effects and reflationary expectations following Trump’s win. Against such a backdrop, risk-free rates had a volatile run, with the US Treasury (UST) yield curve shifting higher in the year.
USTs weakened further in December, as caution prevailed following the November sell-off. As widely expected, the US Federal Reserve (Fed) raised interest rates by 25 basis points (bps). 10-year UST yields ended the month at 2.44%, about 6 basis points (bps) higher compared to end-November levels.
2016 was a year of surprises. The Federal Reserve (Fed) backtracked on its outlook on interest rate hikes, Britain voted to leave the European Union, Donald Trump triumphed over Hillary Clinton to become the 45th US President, and Italian Prime Minister Matteo Renzi resigned after a resounding defeat in the Italian referendum.
We are currently in a position where we are facing more questions than answers regarding Trump's policy stance as he comes into office and how it will affect the market.
UST yields surged in the month as Trump's election victory prompted expectations of a significant fiscal package and possible upside inflation risk under the new administration.
October was another difficult month for Global credit markets, in particular for Investment Grade bonds. By contrast, more risky High Yield bonds outperformed. In terms of sector results, financial issuers outperformed.
USTs ended lower in October. Better US economic data and a hawkish statement from the Federal Open Market Committee (FOMC) bolstered expectations of a December interest rate hike. 10-year UST yields rose about 23 basis points (bps) to 1.83%.
USTs ended September mixed. While the Federal Reserve left interest rates unchanged and the Bank of Japan reinforced commitment to monetary easing, the ECB's lack of new stimulus disappointed the market.
Central bank policy from the US, Japan and Europe are strongly affecting the current global fixed income markets. New Zealand and Canadian economies also face continued pressure. We maintain the view that there is a positive environment for emerging markets, but have moved slightly more cautious.
On the back of expectations that the Fed will keep interest rates on hold in the next months, the global search for yield is likely to support demand for Indian, Malaysian and Indonesian bonds.
In developed markets, global bonds have benefited from recent flows out of Japan into positive-yielding markets. We maintain the view that there is a positive environment for emerging markets.
July saw US Treasury yields ending in mixed trading. Yields of shorter maturities climbed, while those of longer maturities fell. Plus updates on Malaysia, Singapore, India, South Korea, Thailand, Indonesia, and others.
The major consideration for markets in June was the Brexit vote in the UK. Although we are sceptical about the most pessimistic scenarios for the UK, there will be some negative impact on growth.
We expect the impact of Britain’s exit from the EU on Asia’s economic activity to be relatively muted, as the region has comparatively low trade links with the UK. Plus updates on US Treasuries, Singapore, India, South Korea, Thailand, Indonesia, and others.
The immediate fallout from the Brexit win has been a strong flight to safety.
US Treasury yields remained largely unchanged in May. The impact of a disappointing US payroll figure was offset by the release of the US Federal Reserve’s April meeting minutes, which revealed that most policymakers favoured a rate hike in June should the US economy continue to improve.
Continued easy monetary policy in Europe and Japan will be supportive for global interest rates, but the case for further limited rate hikes in the US remains in place for 2016.
Yields of USTs climbed steadily for the most part in the month. Hopes of stabilization in the Chinese economy, due to recent economic numbers printing better than expected, underpinned demand for riskier assets.
US Treasuries ended mostly higher in March, while risk assets rallied. Although US labour data mitigated fears of a recession, the Federal Reserve now expects to raise interest rates twice this year.
Oil prices were at the forefront of investor attention in February. Risk assets started the month on weak footing, weighed down by stumbling oil prices and worries about teh health of European banks.
In 2015, the US Federal Reserve began the process of interest rate normalisation. Short-term bonds underperformed long duration bonds, on expectations of the ongoing US economic recovery remaining weak, and US inflation being anchored at current low levels.
US Treasuries registered gains in January. Global investors again focused on China at the start of the period, as successive weaker USDCNY fixings.
The current depreciation trend of the RMB against USD should be seen as a broad-based depreciation of the RMB and not bilaterally to the USD. The trend started from the second week of November 205 and it is clear that the move was planned well ahead.
2015 has been a tumultuous year with a plethora of risk events spurring significant volatility across most asset classes. Against this background, Asia USD credit delivered a modest return compared to 2014, but still a decent one when compared to other asset classes.
USTs ended lower in December, trading in a relatively tight range over the period. The US Fed began the process of interest rate normalisation.