In recent weeks there has been a lot ink spilled in financial newspapers as to whether we are now at the end of the global bull market for bonds. We asked a series of the region's top fixed income analysts whether they
- thought the bond bull market was over
- what it means for Asian issuers.
Ivan Lee, Citigroup
So is the bond bull market over?
No, I don't think so although the relatively busy primary calendar may push spreads a bit wider in coming months. Sectors that do not see much supply are likely to see spreads grind tighter. These include Thai bank sub-debts, Indonesian corporates and Singapore names. Overall in Asia, we still expect to see stable credit fundamentals and excess liquidity, both suggest a significant widening of credit spreads is not on the horizon.
So issuer should be okay?
The market has been absorbing new supplies very well in the past few months. Issuers should take advantage of the current keen appetite for credit products and the 40-year low interest environment.
Damien Wood, ING
Is the end nigh?
Yes, we are at the end of the Asian US dollar bond bull market. Yields overall will rise in the next 12 months for Asian US dollar bonds. The best performers will be short dated bonds with cheap credit risk. The worst performers will be long dated bonds with tight credit spreads.
So issuers will suffer?
High grade issuers looking to issue long dated bonds should accelerate plans. For high yield issuers it is less urgent. Rising US treasury yields and stock prices are a reflection of growing risk appetite. Much of this comes from greater confidence in global economic growth in the coming 12 months. This should help narrow spreads for high yield issuers. In turn it will offset the rise in US treasury yields.
Abdul Hussain, CSFB
Is this the end of the bond bull market?
In the short run (possibly the next four to five months) yes. Our US interest rate strategists believe that the Fed called it wrong by cutting rates only 25bp at the last FOMC meeting. In their view, this means that over the short run, rates are headed higher, with the 10 year possibly topping out near 3.75%, if the Fed does not act at all. Following that however, yields should correct, either via Fed action or (rather more unfortunately) via market action, as the market begins to factor in a recovery that could be derailed by higher rates. Either way, we would expect rates to fall, possibly by year end, with the 10-year US treasury forecast to be in the low 3% range by then.
Is this bad for Asian issuers?
The Asian supply line still looks healthy. Absolute levels of yields are still attractive and credit spreads continue to be tight, encouraging borrowers to lock in cheap mid to long term funding. On the demand side, liquidity continues to be strong both in the region and globally. The only factor would be, that if the recovery does stall, capital expansion needs may decline and the need for raising capital other than for refinancing my slowdown. Having said that, we continue to believe that rates will adjust before they cause any long term damage to growth and we continue to expect the more credit intensive names to outperform the high quality names at least going into the fourth quarter.
Fan Jiang, Goldman Sachs
Is the bond rally over?
Yes, I do think we are at the inflection point and I see the sector getting sold off (though perhaps not aggressively and drastically). The sell-off, in my view, would be relatively more visible in the high yield sector than it is in the high grade sector for two reasons: (1) investors with higher risk appetite (this would include some of the retail clients in the region) would be relatively more inclined to switch into equity and (2) the movement of the dollar may continue to work against high yield credits with low dollar pricing. The sell-off could be relatively more damaging for the longer-end of the curve than the shorter end in my view.
Continued refinancing needs and recap needs (with the banks) are likely to lead to more issuance in the second half of 2003 (vs. second half of 2002), and narrower gap between onshore and offshore rates would likely induce potential issuers to consider dollar financing vs. domestic currency (re)financing. Incremental new supplies, coupled by incremental new debt driven by increasing capex (we may be at an infliction point in corporate capex as well), may prevent the sector from outperforming as well.
I also see the credit rating cycle peaking at this point with downgrades potentially outnumbering upgrades going forward. This too, would pull the sector back a little bit, relatively speaking. Asia may appear to be "cheap" relative to our counterparts in the US and Europe, but the credit quality in our region may deteriorate whereas the ones in the US and Europe may improve gradually.
Stephen Cheng, UBS
Your view?
I am relatively constructive still on Asian credits but I think there is a two pronged strategy: in high grade, to take advantage of any supply to switch into comparable credits with decent yield pick up. For high yield - as an asset class - I think it is still appropriate to be overweight. However, I would become increasingly selective, especially with new issues. Momentum is slowing and the focus on credit fundamentals is becoming more important again in this asset class. In short, with momentum/volume in bonds expected to slow (if only at the margin), it's essential to focus on fundamentals of the credit and the liquidity of the bonds again.
