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#Investments — 16.02.2017

Bond markets outlook

Francesca Rinaldi

Current trends in European & Asian bond markets

European bond market outlook

Since the end of January, Euro sovereign bonds have been dominated by  volatility. At the same time, stronger growth and better-than-expected inflation had impact to long-end yields, as ECB tapering expectations increased. Anyway last week, the risk off mood pushed back core Bond yields (10 year Bund retraced to 30 bps from 45 bps).

In the USA after the initial excitement about President Donald Trump’s economic policies, investors seem to be gauging what implications particular markets might glean from the new US administration’s increasingly protectionist rhetoric and the political confusion around its immigration policy.

How US policy evolves will, however, be an important consideration for the Eurozone authorities too. If the less desirable path for US policy were to crystallize, we would expect it to add to the domestic political risks facing the Eurozone during 2017 and reduce the ECB’s ability to begin signaling an exit.

Peripheral spreads have narrowed in the last few days from very wide levels above the previous PSPP range (France and Italy). Considering the approaching of elections in Netherland and France, we expect again volatility amid an overall sideways move in the next few weeks.

 

Asian bond market outlook

Asian Market resumed a full week of trading after new year holidays with relatively light in primary market new issues. Total issuance amounted to USD 4.7bln including Bank of China USD 2bln 3Y fixed and floating and 5Y fixed rate bonds. Shanghai Pudong Development Bank issued a 3Y USD note. In the HY front, Neerg Energy and BUMA both issued USD 5NC3 bonds while Pakuwon Jati issued a USD 7NC4 bond. For Chinese corporates, there were 2 new issues including Future Land Development USD 3Y and China Singyes Solar Technologies USD 2Y.

Secondary market continued with a bit of rally during the beginning of week given the UST movement and then we saw some profit taking by the end of the week. In Asian IG, trading has been active in financials, corporates, utilities and oil & gas sectors. Investors are eager to put money to work and demand for bonds has been persistent. Benchmark spread tightened by 2-4bps overall and JACI IG index ended at 177bp. For Asian HY, there has been steady 2-way flow with good technical support. Both Property and Industrials ended the week broadly unchanged.

We are taking defensive stance on the current market sentiments which is quite optimistic.