The United States has been aggressively raising rates to curb inflation. Coupled with quantitative tightening, US Treasury yields will remain under pressure. US 10-year Treasury yield has once topped 3.48% in June, after hitting 2.93% in May. Whether the Federal Reserve (Fed) can take prompt actions to contain inflation is a key focus for global markets. BEA Union Investment expects the US yield curve might remain flattened for a long while if the risk of recession heightens. The impact of quantitative tightening on markets will be profound. That said, global risk-off market sentiment could bring pressure to bond yields from time to time. Trailing steps of the US, Asian central banks including South Korea, Malaysia, the Philippines and India, also raised rates in May. We believe monetary policies in those regions tend to be tightened, inevitably leading to greater volatility in yields.
The monetary policies of China and the US are divergent. China's onshore bond yields trended lower in May. A strong greenback has narrowed the Chinese and US interest rate spread, potentially bringing pressure to the Renminbi and bolstering interest rate sensitivity. Our investment teams believe the Renminbi will remain weak in the short-term, with onshore yields continue hovering at current levels. The probability of China launching a large-scale quantitative easing programme was perceived to be low. This could put a lid on the upward trend of onshore yields given monetary policy remained moderate.
China headed towards growth target on relatively loose monetary policy
As China is determined to stabilise economic growth, markets expected the government to reach its "stable economic growth" target by a relatively loose monetary policy. In the State Council's executive meeting on June 1 chaired by Premier Li Keqiang, China expressed the need for speedy implementation of the 33 stimulus measures spanning six areas, including large-scale tax rebates, infrastructure projects, policies supporting auto sales and relaxing property austerity measures. The PBOC also saw lowering the reserve requirement ratio as one of the potential stimulus tools.
China continued with its zero-COVID strategy, pressing on with its strict lockdown policy to suppress the number of confirmed cases. In early May, the situation showed signs of abating and the number of COVID cases retreated. On expectations of a relatively loose monetary policy, BEA Union Investment believes China’s economic growth may gradually gather steam in the next few months, albeit at a relatively slow pace. The Chinese government has plans to relax property measures, but implementation takes time. Property sales remained lackluster, while lockdowns dampened buying sentiment. In addition to that, some developers were cash strapped, we expect default cases will continue. As such, our investment teams stay cautious towards China's property bonds.
APAC bonds' short durations create buffer against rising rates
When the world is reeling two years into the pandemic, and with the emergence of different strings of variants, the US and Europe have shifted strategy to embrace COVID by gradually opening up their doors. Since March, 27 eurozone members relaxed their pandemic restrictions, and Asian countries followed suit and conditionally reopened borders. However, stretched global supply chains, elevated commodity prices, and continuing Russia-Ukraine war further pushed energy prices higher. Against this backdrop, our investment teams favour short-term, high-yield bonds in the financial sector which are more defensive and Southeast Asian high-yield bonds. These bonds offered attractive yield spreads, and will be benefited from rising commodity prices. Asian bonds have shorter durations, which can cushion the impact of rising interest rates have on portfolios.
Asian investment grade credits are relatively more defensive
From the perspective of investment grade bonds, the volatility of Asian investment grade bonds is lower than that of their US counterparts. They are also defensive tend to have positive ratings.
Source: JP Morgan, Data as of March 31, 2022.
Among them, our investment teams prefer investment-grade credits of banks and logistics, as these industries often have stable and quality assets, strong capital and cashflow, which are defensive in nature. The pandemic elevated the demand for the logistics and transportations sectors, supporting their business growth .
Views on Asian bonds
India's Consumer Price Index stood at 7.01% in June, which was flat from the previous month but still sharply exceeding the central bank's target of 6%. The Central Bank of India raised rates by 50 basis points to 4.9% in June to combat inflation. Continued inflationary pressure and Russia-Ukraine conflict have tightened global energy and materials supplies, which were deemed favourable to high-yield bonds of India's commodities as well as its iron and steel industry.
Coal and oil have always been major energy resources that drove India's industrial growth and modernization. Having said that. more corporates and individuals have been turning to renewable energies encouraged by positive measures from the Indian government. Renewable energy taxes are now lower than those of traditional energies. In addition, lower solar panel installations costs have also contributed to higher penetration rate. As the world's second-largest populated country, India is fast headed towards becoming a nation of renewable energy production. As the country owns vast market size and huge room for growth, our investment teams remain positive on India's renewable energy high yield bonds.
In June, Indonesia's Purchasing Manager Index came in at 50.2. Despite soaring energy prices, strong export growth and a widened trade surplus, the country's inflation stood at a manageable level. Due to heightened geopolitical tension, coal prices remained high. We believe related corporates could be benefited from high commodity prices and thus stronger operating cash flow, further alleviating their debt burden. Separately, Indonesian government passed a series of easing policies on the property sector, which improved credit rating fundamentals. Although Indonesia will likely follow its peers to raise rates, mortgage rates remain low, which can support the demand from both homeowners and investors. Hence, we are also positive on Indonesian commodities and property high yield bonds.
Following China's zero-COVID policy, Hong Kong did not relax its pandemic restrictions on a large scale. Arrival and quarantine requirements have hindered business connections and travel. Local retail and catering industry were unable to be back to the normal. Markets pinned hopes on speeding up border reopening with the new Chief Executive took office. Together with the new round of consumption voucher, the consumption sector is believed to be supported. Our investment teams stay positive towards Hong Kong investment grade bonds issued by corporates that have a defensive nature with and those investment grade bonds with high credit rating.
As there were new cases of COVID, Macau government launched a city-wide testing in a bid to suppress the pandemic. The authorities urged all other businesses, including casinos, to stop operating except those providing daily necessities. Macau’s gaming sector continued to be under pressure by the fluctuating pandemic and the regulation on the VIP gaming industry. The number of travelers slumped, increasing cash flow consumption. We therefore remain cautious towards Macau's gaming sector and believe sentiment could only improve when borders reopen and the new gaming measures are fully in force.
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