Asian US dollar (USD) investment-grade (IG) and high-yield (HY) credit spreads tightened in September after three straight months of widening, as we start to see a consolidation of credit spreads. Bloomberg Asia IG spreads tightened m-o-m by 1 basis point to 85 basis points (bps) and HY spreads tightened by 12 bps m-o-m to 504 bps as at Sept 30. The 50 bps rate cut announced by the US Federal Reserve and the renewed stimulus package released by China have boosted risk appetite and caused the credit spreads to tighten.
Improved primary market issuance
As a result of the Fed rate cut, the market has been very receptive and has seen quite a large number of issuances in September (US$25.3 billion ($33 billion)) compared to August (US$8.2 billion). This was a stark difference of 207%, based on Bloomberg data and our calculations as of Sept 30. With lower costs of borrowing after the rate cut and still tight credit spreads, companies or issuers could remain incentivised to raise debt, either for refinancing or if they are positive on growth prospects. Significant issuers in September included sovereign linked issuers and corporations such as Saudi Arabian Oil Co or Aramco (two issuances totalling US$3 billion), Meituan (two issuances totalling US$2.5 billion) and the Export-Import Bank of Korea (three issuances totalling US$2 billion) as of Sept 30.
Favourable year to credit market amid rate cut expectations and decent macroeconomic environment. Credit: Bloomberg, OCBC
China’s stimulus — is it different this time?
Cities such as Shanghai, Guangzhou and Shenzhen in South China’s Guangdong Province all eased their property policies, starting with the People’s Bank of China (PBoC) adjusting the pricing mechanism for mortgage rates. These were part of a broader effort to stabilise the real estate market and generate positive market sentiment:
- According to Bloomberg, China is contemplating a two-step plan to reduce interest rates on approximately US$5.3 trillion of mortgages. The objective is to lower borrowing costs for millions of households and alleviate the profit pressure on the banking system. According to insiders, financial regulators have suggested a nationwide reduction of around 80 bps on existing mortgages. This proposal also includes an expedited timeline for mortgage refinancing eligibility.
- In terms of monetary policy, PBoC governor Pan Gongsheng announced an upcoming reduction in the reserve requirement ratio (RRR) by 0.5 percentage point (ppt), which will inject approximately RMB1 trillion of long-term liquidity into the financial market. Depending on liquidity conditions, an additional RRR cut of 0.25 ppt to 0.5 ppt may be introduced later this year. Moreover, the central bank will lower the seven-day reverse repo rate by 0.2 ppt, from 1.7% to 1.5%. This adjustment is intended to guide both loan prime rates and deposit rates lower, while maintaining the stability of commercial banks’ net interest margins.
- In the capital markets, three major developments have been announced. Firstly, the PBoC introduced two structural monetary policy tools: An RMB500 billion ($92.3 billion) swap facility for securities, fund and insurance companies, and an RMB300 billion re-lending facility for stock buybacks. Under the swap facility, qualified institutions can use assets such as bonds, stock ETFs and CSI 300 index components as collateral to exchange for highly liquid assets, including government bonds and central bank bills. The initial size of the swap facility is set at RMB500 billion, with potential expansion based on market conditions. The funds obtained through this facility must be used exclusively for stock market investments.
- According to Bloomberg data, China has experienced local corporate bond defaults amounting to RMB12.7 billion this year. This includes 15 public offerings and two private offerings. Offshore bond defaults have remained at US$17 billion, involving 28 USD bonds and two HK dollar notes.
See also: JPMorgan sees 10%-15% Chinese yuan slide in response to trade war
Singdollar credit market
The SGD credit universe returned 1.14% m-o-m in September. Outperformers were longer dated issues, bank capital and non-financial corporate perpetuals. While SGD Sora OIS compressed 4 bps to 8 bps for two- to three-year tenors and remained largely unchanged for the belly and 10-year tenors, spread compression drove most of the outperformance.
Issuance levels remain similar m-o-m: About $1.3 billion in issuance was priced in September, which is similar to the amounts that were priced in
August. The largest issue was Standard Chartered London’s 5.3% perpetual security, which has been well absorbed and trading more than 3 points above par currently.
We do not have an underweight position on any sector of the Singapore-dollar credit market. We prefer laggards that did not rally as much in the past month, including papers that are short in duration and up to the belly (four to seven years), and also select crossover credits which are attractive from a risk return perspective and now provide a decent yield pick-up over higher rated papers.
Wong Hong Wei, Andrew Wong, Ezien Hoo and Chin Meng Tee are credit research analysts with OCBC’s global markets research team.
