This is a sponsored article from State Street Global Advisors.
The recent spikes in volatility caused by the escalating global Covid-19 pandemic have shaken markets in unprecedented ways. In response, investors have tried to contain their exposure to risk by moving their money into what they perceive to be safer havens. Against this backdrop, we will look at how the flight-to-quality has affected bond markets, particularly in Asia.
Assessing the recent uncertainty
The spreading virus has prompted fears that a shutdown of economic activity and supply chains disruption would lead to significant damage to the global economy. The situation was not helped by Saudi Arabia’s decision to launch an oil-price challenge against Russia, which caused energy prices to tumble.
Since then, markets have been highly unsettled, even as governments and central banks around the world announced supportive measures.
We believe that higher levels of volatility will remain a fact of life until markets can establish a clearer picture of when the pandemic’s peak point will be reached.
Central banks take unprecedented action
Governments and central banks have responded to the rapidly changing situation by taking aggressive and unprecedented action to protect individual economies. The US Federal Reserve (the Fed) announced emergency rate cuts of 150 basis points (bps) in total, which brought rates down to 0%.
The Fed’s moves were mirrored in other countries, with the European Central Bank and Bank of Japan both announcing accommodative measures, while the Bank of England cut rates by 50bps and introduced a term-funding scheme. Elsewhere there was policy easing in New Zealand, South Korea and Australia, and, more recently, Thailand.
Global fiscal coordination within the European Union (EU) and across other regions must support income, credit lines, insurance and basic health care for the vulnerable. Germany’s offer to help Italy and issue EU-wide debt is a positive step in this direction.
In addition, the US Senate and House of Representatives approved a US$2.2 trillion aid package – the largest in history – targeting mortgages, student loans, credit cards and public housing. It should set the tone for other countries.
Investors find an unexpected haven in Chinese bonds
While global stock markets have plunged, the surge in safe-haven demand has primarily benefitted bond markets. Yields have fallen, with the 10-year US Treasury yield dipping below 1% in March. However, as the situation deteriorated, market volatility began to simmer in bond markets too. What’s more, investors have been flocking towards cash, resulting in a change of direction for bonds and a sell-off in mid March; yields on US, German, and UK government debt climbed sharply.
Asian bonds too were initially supported by global central-bank easing, but they have not been immune to the recent sell-off. However, Chinese bonds have followed a different trajectory. Due to China’s aggressive moves to ringfence the spread of the virus, and the fact that new cases in the country have been declining, investors now view China as a more resilient and a somewhat unlikely ”haven” amid the virus-linked sell-off. As a result, Chinese government bonds have rallied. The yield premium that the asset class continues to offer is a bonus for investors, especially in the lower-for-longer rate environment. South Korea also offers a glimmer of hope, as the country appears to be containing the epidemic.
It is worth taking a pause to evaluate the performance and ponder on the fundamentals of Asian local currency bonds vis-à-vis the other peers especially in turbulent time like this. For the month of March, Asian local currency bonds returned -3.31%, while Asian credit in USD returned -5.83% and the global emerging market local currency bonds returned -9.67%.1 The stronger fundamentals, market structures and dynamics of Asian economies and bond markets are some of the main factors underpinning the resilience of Asian local currency bonds. This is a crucial point of consideration for investors seeking to diversify their portfolios as Asian bond markets continue the positive momentum of market reforms.
Higher volatility will continue; selectivity is key
There is the potential for market rallies on the back of policy surprises from central banks. However, we also expect to see a slew of downbeat data on the negative impact of the outbreak on the world’s economies, including downward revisions to earnings estimates and declining PMI figures. This inevitable economic fallout will likely further accentuate the differences between territories with strong fundamentals and those that are more vulnerable to black swan events.
Visit www.abf-paif.com* for our latest insights and investment ideas for Asian fixed income.
1 Source: State Street Global Advisors, data as of 31 March 2020. The return of Asian local currency bonds is calculated based on Markit iBoxx ABF Pan Asia Index. The return of Asian credit is calculated based on JP Morgan Asia Credit Index. The return of global emerging market local currency bonds is calculated based on JP Morgan GBI-EM Global Diversified Index.
FOR USE WITH THE PUBLIC.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Past performance is not a guarantee of future results.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The views expressed in this advertisement are the views of Kheng Siang Ng through the period ended 6 April 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web: www.SSGA.com*
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong • Telephone: +852 2103-0288 • Facsimile: +852 2103-0200 • Web: www.SSGA.com*
This advertisement has not been reviewed by the Securities and Futures Commission of Hong Kong (the “SFC”).
© 2020 State Street Corporation – All Rights Reserved. 3023978.1.1.APAC.RTL. Exp. Date: 04/30/2021
*This website has not been reviewed by the SFC.
This is a sponsored article from State Street Global Advisors.