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May 2024

JKC Asia Bond 2025 – Fixed Maturity Fund May 2024 Update:

  • The global dollar bond markets corrected in April as US Treasury yields jumped on the back of sticky inflation, dimming expectations of US rate cuts in the near term.
  • The rebound of the US dollar exacerbated the generally risk-off tone in global credit markets, most Asian currencies falling to multi-month lows.
  • Chinese equities however bucked the global trend as 2023 corporate earnings came in better than expected, helping to offset the headwinds for Asian High Yield (HY) credit.
  • Speculation of a government led initiative to address the property inventory problem in China grew but no concrete plans have been announced yet.
  • Asian HY bond indices declined in April, but Chinese optimism tempered these losses.
  • JKC Asia Bond 2025 slightly outperformed the wider market due to the fund’s short duration positioning.

After a strong start to the year, Asian credit markets finally consolidated in April as the US interest rate outlook shifted and global risk assets contended with the prospect of tighter than expected financial conditions and a corresponding rebound in the US dollar. The market’s perception that US rate cuts may be delayed this year had been building in the first quarter but stronger than expected Non-farm Payroll data in early April followed by a higher than forecast Consumer Price Index all but confirmed these fears. At the start of the month, the market implied probability of a rate cut before July 2024 was 95%. By month-end however, not only had these odds fallen to 22%, but most economists were now expecting the first cut to not come until November or December at the earliest. The Federal Reserve supported this view with many representatives of the FOMC panel saying that inflation in the US was proving to be much stickier than expected, helping the “higher for longer” narrative take root. The 2-year and 10-year US Treasury yields ended the month at 4.95% (+41bps) and 4.68% (+48bps) respectively, the 2-year hitting its highest level since November 2023.

Higher yields unsurprisingly translated into a continued rebound in the US dollar, particularly against Asian currencies with the TWD, KRW, IDR, PHP, THB all falling to their lowest level since 2022. The JPY meanwhile hit a 30-year low despite the Bank of Japan raising interest rates the previous month. The Chinese RMB also weakened against the dollar although by a lesser extent than other currencies in the region suggesting some form of intervention by the PBoC, the Chinese central bank, along with a growing feeling that the Chinese economic cycle was bottoming.

Naturally the higher treasury yields weighed on Asian USD bonds while the stronger dollar exacerbated that trend as regional credit spreads widened, following a similar trend seen in global developed and emerging market bonds. The Asian weakness was however tempered to an extent by a rebound in regional equities, led by Chinese H-shares (Chinese stocks listed in Hong Kong), which helped offset the global sentiment weakness. As a consequence, the Asian HY Index (AHBI) declined by just -0.19% in April while the more rates sensitive IG Index (ADBI) fell by -1.51%.

While the initial driver for the Chinese equity rebound centered around rumours of more government policy relaxation, particularly in the property sector, the recovery gathered momentum throughout the month as Chinese corporate earnings season produced a set of better-than-expected results for both 2023 and 1Q24 where available. It started to become apparent that some investors may have been too pessimistic about the Chinese economy, and we saw fund inflows into Chinese stocks. At month end, reports of a top level politburo meeting to address the Chinese economy and in particular an announcement that plans would be studied to solve China’s property inventory problem may provide further impetus to the recovery going into May. This was also reflected in Asian HY credit markets as Chinese bonds (including non-distressed property) outperformed other regions and reduced the losses for the HY index that came mostly from declines in long duration sectors such as Macau gaming and Hong Kong conglomerates. Distressed China property bonds continued to languish as, despite a more upbeat tone from the government on China property, there was still no indication of financial support for defaulted development companies.

Indian and Indonesian markets were flattish with few major catalysts during the month. India’s month-long elections started in April but we will not see any strong indication of results until later this month. In Indonesia we did see a small sell off in property names after Lippo Malls (LMRTSP) dropped on fears the company has not yet arranged financing to cover its June 2024 maturing bonds. On 24th April the Indonesian central bank announced an unexpected 25bps increase in policy rates to 6.25% which although helping to stabilize the IDR probably added to pressure on Indonesia real estate issuers. Another company which saw volatility in April was China Oil and Gas (CHIOIL) which dropped on reports it would delay its results as its auditor, PwC, needed more time to complete the audit process. The audit report was finally completed before the month end, and the bonds staged a recovery.

JKC Asia Bond 2025 ended the month up +0.15%, slightly outperforming the wider Asian HY market on account of the very low duration of the fund which reduced the impact of higher US Treasury yields. In the month ahead we will continue to focus closely on Chinese policy discourse, particularly regarding real estate inventory, and we will study the outcome of the Indian elections and any potential market implications.



                                                                    Source : Bloomberg, JKC – May2024

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. The information contained herein is issued by JK Capital Management Limited. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed. 

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