Yes, there’s a lot to be worried about just now. The second wave of COVID-19, the US elections, Fed inflation policy, simmering trade disputes plus problems relating to the uneven recoveries by the Asian economies. On the technical side, we believe market participants will have to contend with diminishing secondary market liquidity, especially in weaker names. 

Despite these near-term challenges, we retain our constructive medium-term view on Asian credit markets in this month’s overview. In our view, the current spread levels are excessive. In particular, the high-yield property sector will benefit from low duration, high coupons and constructive primary supply dynamics from 2021. We believe market participants should take comfort that the Fed supports a lower-for-longer policy rate to the end of 2023. Furthermore, we expect to a see global synchronized economic upturn that will lift the profitability of corporate and financial sectors alike.  

We note in Credit Review that the overall performance of investment-grade credits (Markit iBoxx ADBI) and the high-yield space (Markit iBoxx AHBI-Corp) in September was weighed down by heavy supply in the Asia ex-Japan USD bond universe, uncertainty around the global economic recovery, and regional and global political issues. The average spread of iBoxx ADBI widened 15bp to 220bp by the end of September. Likewise, the spread of iBoxx AHBI-Corp moved out 81bp to 845bp over the same period. In terms of total returns1, ADBI and AHBI-Corp reported losses of 0.46% and 1.68%, respectively, in September.  

Surprisingly, Asia’s primary market saw a record level of activity in September, with bond supply totalling USD41.6bn, up 95% m-o-m and 29% y-o-y; this is the highest-ever level of issuance in a single month. As a result, total supply in the Asia (ex-Japan) credit market reached USD260bn (USD273bn if EUR-denominated bonds are included), as of the end of September. 

China’s state-owned enterprises (SOEs) have been expanding overseas for some years as part of the government’s ‘Go Global’ strategy. However, the pace is set to slow amid US-China tensions, which will curb the net supply of bonds. Despite this, we believe the impact from potential US sanction risk is limited, as most SOEs have less than 10% of their debt denominated in USD. The exception is ChemChina, which generates a significant amount of its revenue from the US and has more than 50% of its debt denominated in USD.   

It’s true that international investors have made a slight reduction in their holdings of these bonds, but the supply has been easily absorbed by the market and price reactions have been largely muted. Overall, we believe international demand for China SOE bonds remains solid, judging from the high level of participation by US and European investors in recent deals. We remain constructive on the China IG SOE sector. We believe market volatility for bonds like ChemChina’s HAOHUA will rise in the following months. But, in general, given China SOEs’ solid fundamentals, access to different funding sources, and strong government support, we believe the segment will maintain its relatively firm performance compared to other China IG corporate names. We reiterate our buy trading calls on YANTZE USD bonds, considering its solid credit profile, broader investor base, and attractive relative value compared to other ‘A1/A+’ rated bonds