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Fed's more hawkish cut seen taking steam out of hot Asia bonds
[HONH KONG] Federal Reserve Chairman Jerome Powell's surprise hawkish tone on Wednesday will likely slow this year's rally in Asian dollar bonds, but market participants see the wave of disappointment as just a speed bump.
Mr Powell delivered on a widely-anticipated quarter percentage-point cut overnight, but dismayed markets by damping expectations for the start of a lengthy easing cycle. Treasury yields and the US dollar rose in Asia on Thursday though a decline in stocks eased.
"The perceived hawkish rate cut will probably take a bit of steam out of a market rally in dollar Asian credit," said Todd Schubert, head of fixed-income research at Bank of Singapore. "We were expecting more of a coupon clipping type of performance during the second half of 2019. Powell's comments don't change this base case."
Asian central banks, including those in India, Indonesia and Korea, had already preceded the Fed in cutting rates, boosting the attractiveness of corporate debt for investors looking for spread. While bets on future Fed rate cuts eased after Mr Powell's comments, bond buyers are still counting on central bankers globally unleashing more stimulus to forestall a rapid slowing in the global economy, which should be supportive of credit.
Asian dollar bonds have handed investors gains of about 8.9 per cent year to date, with high-yield notes out-performing investment-grade offerings.
"This is going to be a short-term setback for the market," said Robert Tipp, chief investment strategist at PGIM Fixed Income. "People are going to continue pushing the edge of their comfort zone in order to get some yield in the portfolio because in the end these central bankers do not want an economic slowdown."
Here's how the Asian dollar bond market reacted to the Fed's dovish turn in 2019:
After a solid start to the year, Asian dollar bond issuance has taken off in the last few months, with record monthly sales in May, June and July, according to data compiled by Bloomberg. Issuers still have a lot of incentive to sell, with memories fresh of the credit crunch in the market in the last quarter of 2018.
• Junk Wave
Led by Chinese developers, Asian speculative-grade issuers have really racked up sales this year, with year-to-date dollar bond issuance already topping past full-year highs.
"For fixed income, given that global central banks are mostly pointing towards rate cuts, high-yield corporate debt and emerging market debt should be well supported by yield-seeking institutional investors, even though their valuations are rich," said Tai Hui, Chief Market Strategist, Asia Pacific, JPMorgan Asset Management.
• Tight Spreads
Spreads on investment-grade Asian dollar bonds crunched to the lowest in 15 months in July.