#Investments — 15.03.2017


Francesca Rinaldi

Current trends in European & Asian bond markets.


European bond market outlook

Last week Mario Draghi message at ECB press conference had a hawkish flavor. While keeping forward guidance unchanged, Draghi conveyed on the improvement of the economic outlook. The greater optimism was reflected in upward revisions to both its growth and inflation projections. GDP growth was revised at 1.8% this year and 1.7% in 2018, both 0.1pp higher than in the December projections. Inflation was revised up by 0.4pp this year to 1.7% and by 0.1pp in 2018 to 1.6%, but still below the 2% target.

So while the ECB was more confident than a few months ago, it would be premature for it to change its monetary policy stance. Such rhetoric was highly anticipated, but evidence that the ECB might turn less dovish in the future, if economic improvement persists, weighed on bond markets, starting in core markets. Ten year Bund yield increased by 7bps to 0.44%.


While there was no explicit change in the monetary-policy outlook, Mr Draghi appeared to support expectations that, in the absence of adverse shocks, the forward guidance on interest rates and QE, and possibly the level of interest rates, are up for discussion over the next few months. Such an environment can only reinforce upward pressure on rates. Anyway in the very near term, potential risk events should prevent core EGB yields from pushing significantly higher.


Asian bond market outlook

Market sentiments turned a little more neutral this past week given the implied probability of a Fed rate hike in March is now 100% and market has been pricing in gradually with 10-year Treasury widened by 10bp reaching 2.6%. New issue volume was down with around USD 6.65bln. Notable deals included for instance Export & Import Bank of China USD 2bln 2-part offering. Lenovo also issued a 5y and Perpetual NC5 bond. In high yield sector, Noble Group issued a USD 750mm 5Y notes while Chinese property developers China SCE & KWG issued new bonds for refinancing.

On secondary trading, despite weakness in Treasuries, Asian credit spreads remained stable. We saw active trading in Tech sector including new Lenovo 5Y, Bidu 25, Baba 24 and Huawei 26. In O&G sector, credit like CNOOC 24 held up well.  Overall JACI IG Index widened by 1bp to 172bp. On the other hand, Asia Sovereigns INDON & PHILIP credit spreads have widened by 10bps. Bonds were down 1.5 to 2bp across the board.

In High Yield sector, we started to see more profit taking with bonds largely down 0.25 to 0.50bp. Market sentiments has turned more defensive ahead of rate hike and a High Yield property developer Central China has issued profit warning. Hence, market seems to feel a correction should be coming in the near term. JACI HY index went up by 6.6bp to 6.62%.


We reiterate our defensive stance in Asian credit market ahead of Fed’s March rate hike. We prefer 5- to 7-year high grade credits (e.g. Financial & insurance credits) and to select good quality short-dated High Yield names (preferably non-property, industrial names).


Market outlook based on BNP Paribas CIB Research


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