Asian bond markets struggled to process the election of Donald Trump on Wednesday, making a temporary shut-down in new issuance appear all but guaranteed, according to market participants.
Asia’s iTraxx investment grade index whipsawed throughout the day as investors reduced their risks. Liquidity in the secondary bond market dried up to the extent that one banker said it had become “an offer-only” market in the hours before Democratic Party candidate Hillary Clinton conceded.
The long-term ramifications of the result are still unclear. Analysts said they could not predict with any certainty what Trump’s policies would be until he took office in January, and perhaps even later. But after Trump’s bombastic rhetoric in the run-up to the election, Asian debt investors greeted the news as a negative.
The iTraxx index — a measure of Asian credit risk — ballooned by around 10bp between the morning and mid-afternoon, as Trump’s win looked increasingly likely. But in a sign that markets were started to adjust to the new reality, the index tightened slightly after the win was confirmed. It was trading at around 188bp by 5.45pm (Hong Kong time), retracing about 50% of the day's move wider.
A fund manager in Hong Kong told FinanceAsia before Trump won that his firm was not trading at all during the day. They were set to have a firm-wide meeting in the afternoon to decide how best to manage their risks in the event of a Trump victory. The firm had already hedged some of the election risk, he said.
“We will have to reassess our strategies,” the investor said. “There’s a panic reaction right now.”
The reduction of risk appetite means that Asia’s new issue market looks destined to remain quiet for the rest of the week, and perhaps even longer.
“I don’t think anyone is crazy enough to go out tomorrow,” said a syndicate banker in Singapore. “Everything we have is now on hold. We will have to reassess next week, or the week after. Investors are risk-off right now. New issue premiums are going to be in the context of 15-20bp.”
The difficulty for investors, issuers and analysts is figuring out the likely policies of a man who has been short on details in the election campaign. His promise to build a wall separating Mexico from the United States received plenty of attention, but the impact on Asia may be more muted.
“The market will focus on Mexico as a casualty of the Trump victory, and the rest of the world will be much more responsive to broader economic fundamentals,” said Kevin Gaynor, Nomura’s head of international research, on a call after the result become clear.
For bond investors, the impact of Trump’s win on US interest rates is likely to come under scrutiny. Several analysts said that the Federal Reserve now looked less likely to hike interest rates in December. But Trump’s talk about fiscal stimulus — including more investment in infrastructure — could eventually cause US rates to rise faster, analysts said.
At least one group of investors can see the bright side. Rajath Shourie, a distressed debt investor at Oaktree Capital Management, told FinanceAsia that Trump’s win — and the asset volatility that may follow — should help him hunt for bargains.