Market insights of fixed income

  • Onshore China Fixed Income
  • Asia Credit
2016-12

From economic perspective, December NBS PMI remained at a robust level. The production index dropped slightly but remained at the second highest level of the year, new order index hit one year high, inventory level stayed low, employment and distribution indicators edged down. Production price continued to rise and inventory replenishment cycle continued under the influence of steady demand and shrinking supply.

Looking at the December medium data, real estate sales declined, other indicators were relatively stable, but the price of the producer continued to rise sharply. In November, major economic data was in line with expectation. Value added of Industry increased 6.2% YoY. Fixed asset investments increased 8.3% YoY, among which, real estate investments growth slid slightly to 5.7%, infrastructure investments increased 13.7%, growth rate for manufacturing investments rebounded to 8.4%, social consumer goods retail sales increased 10.8% YoY. November real estate sales area increased 8% YoY, new construction area increased 3% YoY, and land space purchased increased 6% YoY, real estate data slid slightly. November M2 increased 11.4% YoY, new RMB loan totaled RMB 0.79 trillion and new social financing totaled RMB 1.74 trillion, better than expectation.

Inflation was in line with expectation in November as CPI increased 2.3% YoY.

Policy wise, Fed hiked interest rates in December as expected but delivered a slight shock to the market with projection of three more moves in 2017, as opposed to previous indication of two. Fed Chair Janet Yellen didn’t stand firm on the dovish stance and reduced the support for the "high-pressure" economy. Dollar index rose sharply in this month, and the central parity rate of RMB against the U.S. dollar fell to its lowest level in more than 8 years. PBoC didn’t have any rate cuts, and guidance rate for 7-day reverse repo remained unchanged at 2.25%, 14-day reverse repo remained unchanged at 2.40% and 28-day reverse repo remained unchanged at 2.55%. Throughout the month, we have seen increasing interest rate with interbank overnight and 7-day repo rate weighted average at 2.31% and 3.03% respectively.

As for the bond market, 10-year CDB and 10-year Treasury bond yield increased 39bps and 6bps respectively for the month. CDB short-term yield climbed faster than long-term yield and the yield curve flattened. In this month, 3-5 year credit bonds underperformed CDB bond of the same duration; LGFV bonds underperformed medium-term notes; AAA rated names performed better than AA rated names.
From the portfolio management perspective, the portfolio position remained mostly the same and we kept the duration of the fund unchanged.

Looking into January, RMB depreciation pressure is expected to mount substantially and together with the pressure from the funding constrains before the Spring Festival, the short-term liquidity will remain tense. In addition to RMB depreciation pressure, the control of asset bubble, control of financial leverage and rising inflation level will also restrict the flexibility of monetary policy. Monetary policy is expected to be tight, and we do not expect to see cut on interest rate or bank required reserve ratio. Fiscal policy is to support the demand, instead of as a strong stimulus. Inflation side, December CPI may fluctuate around 2.2%.

Rates bond side, short-term economic indicators are stable, inflation is strong and inflation expectation rises. At the same time, Fed hiked interest rates in December and had a more hawkish tone. RMB depreciation pressure will further increase and together with the pressure from the funding constrains before the Spring Festival, the short-term liquidity will remain tense. In the medium term, overseas markets still have great uncertainty and the implementation of Trump’s proposed policies may again affect global risk preference and reflation expectations. For next year's economic fundamentals, the contribution from real estate to the economy may be weaker, and economic may mainly rely on the infrastructure, with its intensity dependent on the level of financial expenditure. On the whole, there is still downward pressure on the economic growth next year but the picking up of nominal growth rate is negative to the bond market. Our suggestion now is to pay close attention to economic fundamentals and RMB exchange rate and watch closely before any operation. Credit bonds side, credit spreads rebound but are still at historic lows even after previous correction and the relative value is still not enough. Monetary policy is essentially tense and the funding rate may remain high in the short run, which is bad for the credit bonds. Our recommendation is to wait patiently for a better investment opportunity for credit bonds at this moment. In addition, credit events occurred rather frequently recently, we should pay attention to credit risk by following more closely on our portfolio holdings.
 

2016-11

From economic perspective, November manufacturing PMI came in better than expectation, with all five sub-factors continuing to strengthen after a strong performance in October, among which, new order indicator continued to increase, raw material inventory improved but inventory for manufactured goods decreased. Price for raw materials raised significantly, employee index and supplier delivery time index both showed improvements. Looking at November medium data, besides a drop in real estate sales, all other indicators remain stable with producer price continue to show significant rises. In summary, economic inventory replenishment cycle is continuing with slight improvements from demand side and significant tightening from supply side. In October, major economic data is in line with expectation. Industrial added value increased 6.1% YoY. Fixed asset investments slide slightly with an 8.8% YoY growth, among which, real estate investments rebounded to 13.4%, infrastructure investments increased 15.3%, growth rate for manufacturing investments slide to 2.8%, social consumer goods retail sales increased 10.0%, much lower than expectation. October real estate sales area increased 26% YoY, new construction area increased 20% YoY, and land purchasing area decreased 0.1% YoY, real estate data declined. October M2 increased 11.6%, new RMB loan totaled RMB 948.7 billion and social financing totaled RMB 147 trillion.
 
Inflation side, October CPI increased 2.1% YoY, in line with expectation.
 
Policy wise, PBoC didn’t have any rate cuts, and 7-day reverse repo execution rate remained unchanged at 2.25%, 14-day reverse repo execution rate remained unchanged at 2.40%, 28-day reverse repo execution rate remained unchanged at 2.55%. Throughout the month, we have seen increasing capital interest with interbank overnight and 7-day repo rate weighted average at 2.29% and 2.67%.
 
Looking at the market, 10-year CDB and 10-year Treasury bond yield increased 18bps and 21bps respectively for the month. CDB short-term yield climbed faster than long-term yield and the yield curve flattened.
 
Looking into December, USD strengthened after Trump was elected as the US next president, and expectation for Fed interest rate hike increased. RMB to USD exchange rate reached historical low, depreciation pressure continue to increase, which puts more constrains to on the central bank for further monetary policies. Meeting of the Central Political Bureau pointed out it is important to implement effective fiscal policies and stick to a consistent monetary policy. Attentions should be paid to inhibition of asset bubbles and economic financial risks at the same time when try to maintain and support abundant liquidity. Due to concerns over inhibition of asset bubbles, control of financial leverage, and RMB depreciation, expectation is that monetary policy will remain at a tight equilibrium state and it is hard to see any easing in short term. Fiscal policy is constrained by expenditure; next year will partly be dependent on the support of PPP. Inflation side, November CPI may rebound back to around 2.2%.
 
Interest rate side, correction may continue in December. In the short run, whether the correction will come to an end depends on central bank’s attitude towards liquidity; however, it is still hard to determine when the tight equilibrium state for monetary policy will end. Besides, the latest economic data still indicates the economy is at economic inventory replenishment cycle. In mid to long term, real estate and automobile’s support to economy will become weaker, infrastructure construction needs to be stronger to hedge the downside; however, fiscal expenditures and deficit will constrain the investments to infrastructure construction. In summary, economy still faces downside risks next year; it is hard to see any improvements for social financing. There are more unfavorable factors right now: funding rate rises, short-term economic stabilization and monetary policy is constrained by RMB exchange rate, inflation, and inhibition of asset bubble. Bond market is under pressure. Credit bonds may continue to face tight liquidity and potential large corrections. Spread value restored, allocations should be made as appropriate. In addition, credit event occurs more frequently, we should pay attention to credit risk by follow up more closely on portfolio holdings.

2016-09

From economic point of view, September manufacturing PMI recorded 50.4, in line with expectation and continued to stay above the midpoint. In addition, the recent two months data are record highs in two years, indicating a better than expected economy. September high frequency data showed that medium data was relatively stable; real estate sales dropped in absolute numbers; coal consuming in electricity generation increased by 5.33%, dropping from the high growth in August; crude steel production fell; coal price rose sharply. August major economic data came better than expectation. Industrial added value increased by 6.3% YoY, 0.3% higher than July. Fixed asset investments increased by 8.1%, remain unchanged from January to July; among which, real estate investments increased by 5.4% YoY, manufacturing investments increased by 2.8% YoY, infrastructure investments increased by 19.7% YoY, and social consumer goods retail sales increased by 10.6% YoY. May real estate data showed that sales area increased by 25.5% YoY, new construction area increased by 12.2% YoY, and land purchasing area decreased by 8.5% YoY. August M2 increased by 13% YoY, which was 1.2% higher than last month end but 1.9% lower than the corresponding period last year. August new RMB loan totaled RMB 948.7 billion and social financing totaled RMB 147 trillion.

Inflation side, August CPI increased by 1.3% YoY, slightly lower than market expectation.

Policy wise, September’s FOMC meeting didn’t announce rate hike. Fed announced to maintain the interest rate within 0.25%-0.50% range unchanged which was in line with expectation, but the tone was a bit more dovish than expected. After the announcement, US stock market increased while bond yield decreased; US dollar depreciated and precious metals rallied.  Interest rate prediction shows a high probability of rate hike within the year, thus a lower possibility in November implies a higher probability in December. According to the decision made by IMF in last November, RMB was officially included in the SDR on 1 October 2016, accounting for 10.92% and becoming one of the five weighted currencies in the basket. Central parity of CNY against USD continued to decrease and RMB foreign exchange index depreciated. There has been no rate cut or RRR cut this month; 14-day reverse repo execution rate was kept at 2.40% unchanged; 28-day reverse repo execution rate was 2.55%. Throughout the month, we have seen decreasing capital interest with interbank overnight and 7-day repo rate weighted average at 2.34% and 2.58%, increased 31bps and 12bps respectively from last month.

Looking at the market, 10-year CDB and 10-year Treasury bond yield dropped 15bps and 3bps respectively for the month. CDB short-term yield dropped less than long-term yield and the yield curve has become flattened; Treasury short-term yield dropped less than long-term yield as well with yield curve flattened. This month, 3-5 year credit bond performed almost the same as CDB bonds overall, while AAA rated names outperformed AA rated names.

Looking into October, switch in central bank’s policy style can be seen very clear in the first half of the year and will continue in the fourth quarter. In October, PBOC is likely to behave more or less the same as previous months, showing higher tolerance for slowing economic growth and financial market volatility. Open market operation, together with various monetary tools, is likely to be used to ensure reasonably ample market liquidity. Economic fundamentals will benefit bond market in the medium to long term. Given the background of Fed’s rate hike cycle, Q4 rate hike expectation plus year-end tight liquidity will put more pressure on RMB short-term depreciation. However, as PBOC’s central parity pricing rule become more transparent, RMB trend has become more foreseeable by the market, which will make the depreciation pressure more controllable.

Interest rate side, October is expected to be volatile. Looking at the fundamentals, PMI has shown that manufacture industry continued to expand, while production and demand have been growing steadily; thus, we can see signals for temporary stabilization. Credit bond side, we will focus on risk and be strict to credit risk control by improving research chain from industry study to single bond selection, as well as follow up on portfolio holdings. Meanwhile, we may try to achieve excess returns through single bond selection based on deep research.  

2016-08

From economic perspective, China’s Caixin PMI in August was largely beyond expectation. All five sub indicators went stronger; production indicators started to go up, new orders indicators finally rebounded after continuous fall, material inventory indicators fell, employee index and supplier delivery time index both showed improvements. PMI showed improvements for both supply and demand sides, in line with medium data. Major economic data in July were significantly lower than expectation. Industrial added value grew 6.0% YoY; fixed asset investment grew 3.9% YoY, a significant decrease. Among which, real estate investment decreased to 1.2%, infrastructure investment fell significantly to 13%, only manufacturing investment had slight rebound. Total retail sales of social consumer goods increased 10.2% YoY. July property sales area increased 19% YoY, new construction area increased 8% YoY, and land acquisition area decreased 28%, real estate sector continues to fall. July M2 growth was 10.2%. There were RMB 463.6 billion newly issued RMB loans and RMB 463.6 billion social financing in July, financial data came in below expectation.

As for inflation, CPI increased 1.8% YoY in July; expectation for August CPI is to go down to 1.6-1.7%.

Policy-wise, PBoC didn’t have any interest rate or RRR cuts, and 7-day repo rate remained unchanged at 2.25%, 14-day repo rate re-opened but the rate remained unchanged at 2.40%. Looking at the whole month, funding rates slightly increased with inter-bank overnight and weighted average 7-day repo rate came in at 2.06% and 2.48%.

From market aspect, 10-year CDB bond yield increased 4 bps, and 10-year treasury yield decreased 3bps. Decrease for short end of both yield curves was bigger than longer end, the curve steepened. 3-5 year credit bonds outperformed same duration CDB bonds overall this month, the performance for local government financing bonds was weaker than medium-term notes; AA rated bonds performed better than AAA rated bonds. ontrolling the wage growth rate; 5) lower energy cost by reforming utility (electricity and gas) markets; 6) lower logistics cost by improving the logistics efficiency. These measures, if well implemented, will help companies to lower operating cost and survive the current struggling environment. 

Looking into September, we expect the August economic data to rebound as August PMI came largely beyond expectation. Monetary policy is expected to stay neutral and steady, and there won’t be any interest rate or RRR cut in the short term. Fiscal policies will be implemented as a supportive rather than simulative tool. Regarding to exchange rates, USD Index fluctuated within a wide range; RMB to USD exchange rate approached the previous low. Currently, the PBoC’s rule for central parity of RMB exchange rate is clearer and the trend for RMB is more predictable, pressure for RMB depreciation is manageable. 

2016-07

From economic perspective, China’s Caixin PMI in July was below expectation. Looking at the five sub indicators, production indicators started to retract, and new orders indicators continued to slide; material inventory indicators, employee index and supplier delivery time index showed improvements. The data showed a weakening economy, although at a slow rate. High frequency data in July showed a steady medium point data, absolute value of real estate sales decreased, power consumption of coal became positive comparing to last year, crude steel production increased, coal prices rose. Major economic data in June were slightly better than expectation. Industrial added value grew 6.2% YoY; fixed asset investment grew 7.3% YoY, a slight decrease. Among which, real estate investment decreased to 3.5%, manufacturing investment decreased to -0.4% YoY, only infrastructure managed to increase 21.8%, and total retail sales of social consumer goods increased 10.6% YoY. June property sales area increased 15% YoY, new construction area increased 5% YoY, and land acquisition area increased 7% YoY, real estate experienced an industry-wise low rate of growth. June M2 growth was 11.8%. There were RMB 1.38 trillion newly issued RMB loans and RMB 1.63 trillion social financing in June.

As for inflation, CPI increased 1.8% YoY in June; expectation for July CPI is around 1.7%.

Policy-wise, FOMC in July did not announce to increase interest rates. The tone for announcement was not hawkish enough and did not show clear instruction of a future interest rate rise; the outlook to economy appears to be more positive; however, it showed concerns about the global economic and financial situation; it recovered its view for the labour market, view for inflation remains neutral. USD appreciated first but was followed by depreciation over the month; RMB exchange rate index slightly appreciated. PBoC didn’t have any interest rate or RRR cuts, and 7-day repo rate remained unchanged at 2.25%. Looking at the whole month, funding rates slightly increased with inter-bank overnight and weighted average 7-day repo rate came in at 2.05% and 2.47%.

From market aspect, 10-year CDB bond yield and 10-year treasury yield decreased 3bps, 5bps respectively. Decrease for short end of CDB yield curve was bigger than longer end, the curve flattened. Ultra long term interest rate debt rose sharply this month, and the spread with 10 year CDB tighened. 3-5 year credit bonds outperformed same duration CDB bonds overall this month, the performance for local government financing bonds was strong than medium-term notes; AA rated bonds performed better than AAA rated bonds.

Looking into August, mid-year Conference of the Political Bureau continued the tone made by “authoritative source” and emphasized on supply-side reforms and “L-shaped” long term economic growth; economic fundamentals are beneficial to bond market in medium to long run. US interest rate hike slows down, European market is turbulent. China onshore CPI and economic data both face downward pressure, and there will be less constrains on monetary policies. Fiscal policies will be used as a support rather than a stimulus. Regarding to exchange rates, USD Index fluctuated and RMB exchange rate slightly appreciated after making a record low. PBoC’s more transparent rules for central parity of the RMB exchange rate made RMB trend more predictable for investors, which is beneficial to control the downside risks.

Condition of interest rate bonds in July is slightly favorable; market is expected to bounce with a downward trend. Fundamentally, the real estate industry chain’s support to the economy weakened, real estate sales, new constructions and investment data are all showing a turning point; economic growth is expected to slow down with weakening CPI, beneficial to bond market. In terms of credit bonds, risk management remains to be the main focus as many low rated bonds are maturing in the third quarter, default possibilities increase. 
 

2016-06

From economic perspective, China’s Caixin PMI was within expectation. Besides production indicators showed improvements, new orders index, material inventory indicators, employee index and supplier delivery time index all declined. High frequency data in June showed a steady medium point data, absolute value of real estate sales decreased, power consumption of coal became positive comparing to last year, crude steel production fell, coal prices rose. Major economic data in May were lower than expectation. Industrial added value grew 6.0% YoY; fixed asset investment grew 7.4% YoY, which is a significant decrease. Among which, real estate investment decreased 6.6% YoY, manufacturing investment decreased 1.3% YoY, only infrastructure managed to keep a YoY growth of 19.8%, and total retail sales of social consumer goods increased 10.0% YoY. May property sales area decreased 24% YoY, new construction area decreased 11% YoY, and land acquisition area decreased 5% YoY, real estate experienced an industry-wise decline. May M2 growth is 11.8%, far below expectation. There were RMB 985.5 billion newly issued RMB loans and RMB 659.9 billion social financing in May; both figures were below market expectation.

As for inflation, CPI increased 2.0% YoY in May, in line with market expectation.
 
Policy-wise, FOMC in June did not announce to increase interest rates. The meeting minute declares all committee members are dovish rather than hawkish, and none of them voted for an interest rate rise mainly concerning risks associated with Brexit and the beyond expected weak non-farm data in May. The interest rate forecast is still showing twice interest rate hikes this year, however, number of officials who believe there will only be one interest rate hike within the year increased from 1 to 6. USD went stronger due to Brexit, RMB to USD middle price made a new low, RMB exchange rate index depreciated. PBoC didn’t have any interest rate or RRR cuts, and 7-day repo rate remained unchanged at 2.25%. Looking at the whole month, funding rates decreased with inter-bank overnight and weighted average 7-day repo rate came in at 2.03% and 2.46%, unchanged and up by 3bps respectively from last month.

From market aspect, 10-year CDB bond yield and 10-year treasury yield both decreased 14bps. Decrease for short end of CDB yield curve was smaller than longer end, the curve flattened. Shape of treasury yield curve showed similar changes. 3-5 year credit bonds outperformed same duration CDB bonds overall this month, the performance for local government financing bonds was similar to medium-term notes; AAA rated bonds performed better than AA rated bonds.

Looking into July, “authoritative source” made comments denied the economic growth powered by leverage in the first quarter, and emphasized on supply-side reforms. He said the economy will keep an “L-shaped” growth and expect the real economy to deleverage. Total demand will have moderate decline, the economic fundamental will be beneficial to the bond market in the medium to long run. Stagflation is a low probability event, monetary policy will not tighten. US interest rate hike slows down, European market is turbulent. China onshore CPI and economic data both face downward pressure, and there will be less constrains on monetary policies. Fiscal policies will be used as a support rather than a stimulus. Regarding to exchange rates, USD appreciated as investors get more risk averse, RMB exchange rate made new record lows. PBoC’s more transparent rules for central parity of the RMB exchange rate made RMB trend more predictable for investors, which is beneficial to control the downside risks.

Condition of interest rate bonds in July is slightly favorable; market is expected to bounce with a downward trend. Fundamentally, economy rebound is expected to slow down with weakening CPI, which is beneficial to bond market. UK’s vote to leave EU brought the global investor rise in risk aversion, and there is a possibility of further fermentation. The market now has higher expectation of further easing monetary policies as there are less constrains on monetary policies. In terms of credit bonds, many low rated bonds are maturing in the third quarter, default possibilities increase. We will stay cautious on credit risk control by having comprehensive research from the industry to individual companies in place and reviewing and monitoring our credit bond holdings.



 

2016-05

From economic perspective, China’s Caixin PMI was 50.1 in May, slightly better than expectation. However, new orders index, inventory indicators, and supplier delivery time index all declined. High frequency data in May showed an overall decline in medium point data and absolute value of real estate sales. Power generation expanded, price of iron and steel, coal, nonferrous metals all declined. Major economic data in April were lower than expectation. Industrial added value was only 6.0% higher YoY; fixed asset investment was 10.1% higher YoY, among which, real estate increased 9.7% YoY, infrastructure investment increased 20.6% YoY, manufacturing investment increased 5.3% YoY, and total retail sales of social consumer goods increased 10.1% YoY. April property sales area increased 44% YoY, new construction area increased 26% YoY, and land acquisition area increased 8% YoY, real estate performance stays strong. April M2 growth is 12.8% higher YoY, far below expectation. There were RMB 555.6 billion newly issued RMB loans and RMB 751 billion social financing in April; both figures were below market expectation.

As for inflation, CPI increased 2.3% YoY in April, in line with market expectation.

Policy-wise, FOMC minutes in April had a more hawkish tone, Yellen said that gradual and cautious interest rate rise in the coming months seems suitable, which simulated the market expectation of an interest rate rise. Looking at mainland China, authoritative spokesman denied that the first quarter growth was pushed by usage of leverage, and emphasized on supply-side reforms. Economic growth has been following an L-shape. Real economy is expected to deleverage and total demand will decline gradually, which is beneficial to the bond market. PBoC didn’t have any interest rate or RRR cuts, and 7-day repo rate remained unchanged at 2.25%. Looking at the whole month, funding rates decreased with inter-bank overnight and weighted average 7-day repo rate came in at 2.03% and 2.43%, down by 1bps and 6bps respectively from last month.

From market aspect, 10-year CDB bond yield and 10-year treasury yield decreased 9bps and increased 9bps respectively. Increase for both ends of CDB yield curve has been similar; shape of the curve stays relatively unchanged. Medium-to-short end of treasury yield curve had a smaller increase, leading the curve steepen. 3-5 year credit bonds outperformed same duration CDB bonds overall this month, the performance for local government financing bonds was better than medium-term notes; 3-year AAA rated bonds performed better than AA rated bonds.

Looking in to June, easing monetary environment will last to the second half of year whilst it’s difficult to see more easing policies on a large scale. Fiscal policies will play a bigger role. Bond supply will increase with local debt accelerating the issuance of replacement. Financial regulation will be stricter under the deleveraging environment. 
In terms of interest rate bonds, long and short views are mixed in June, and the general market will likely to remain volatile. Fundamentally, rebound of economy slowed down with data medium dropping, CPI weakens, which are beneficial to bond market. At the same time, more potential risks are seen in June, which include difficulty to have further easing monetary policy, stricter financial regulations, stronger expectation of Fed interest rate rise, possible capital disturbance under MPA assessment, etc. In terms of credit bonds, there are less default cases and credit spread tightened. We will stay cautious on credit risk control by having comprehensive research from the industry to individual companies in place and reviewing and monitoring our credit bond holdings.

 

2016-04

From economic perspective, China’s Caixin PMI was 50.1, lower than expectation but still above the midpoint, which is in line with the seasonality. Major March economic data came in beyond expectation. Industrial production rose 6.8% YoY; fixed asset investment increased 11.2% YoY, in which real estate investment increased 9.7% YoY, infrastructure investment increased 22.0% YoY, manufacturing increased 5.7% YoY, and total retail sales of social consumer goods increased 10.5% YoY. In addition, March property sales area increased 38% YoY, new construction area increased 27% YoY, and land acquisition area increased 5% YoY. March credit data was beyond expectation as well with 1.37 trillion newly issued RMB loans and RMB2.34 trillion social financing.

As for inflation, CPI increased 2.3% YoY in March, slightly lower than market expectation.

Policy-wise, April FOMC meeting announced to keep the interest rate unchanged with a neutral tone. PBoC didn’t have any interest rate or RRR cuts, and 7-day repo rate remained unchanged at 2.25%. Looking at the whole month, funding rates increased with inter-bank overnight and weighted average 7-day repo rate came in at 2.04% and 2.49%, up by 1bps and 3bps respectively from last month.

From market aspect, 10-year CDB bond yield and 10-year treasury yield increased 18bps and 5bps respectively. Medium-to-short end of yield curve had a greater increase, leading the curve flattened. 3-5 year credit bonds underperformed same duration CDB bonds overall this month, while the performance for local government financing bonds was about the same as medium-term notes; AAA rated bonds performed better than AA rated bonds.

Looking into May, the easing monetary policy is likely to emphasize on prudence. The Central Political Bureau Meeting recently mentioned about more attention should be paid to inflation, while PBoC also showed concerns over assets bubble and prices. The fact that PBoC chose to use massive open market operations and MLF to hedge the base currency gap instead of RRR cut reflected that more obstacles are constraining monetary policies.

In terms of interest rate bonds, the yield may stabilize in May after the huge increase in April. Fundamentally, the economy may not rebound as much as expected, which may stabilize the bond market marginally. Inflation still exists and will continue to add more pressure to the bond market. Policies to replace business tax with value-added tax will help to appease market sentiment, narrowing the yield gap between financial bonds and treasury bonds. Looking at medium to long term, economic rebound is difficult to sustain, and inflation may start to go down in May. In terms of credit bonds, default cases will further widen the credit spread.

2016-03

From economic perspective, China's official manufacturing PMI increased to 50.2 in March, above the midpoint for the first time since August 2015; Caixin PMI came in at 49.7, a 13-month high, reflecting a peak season for new projects. Signs of stabilization can be seen in the short-run as real estate sales stayed high and real estate investment growth rebounded.  Credit data for January – February was beyond expectation, with 3.3 trillion new credits and 4.2 trillion social financing; proportion of medium to long term loans has also increased during the period.

As for inflation, CPI increased 2.3% YoY in February, significantly exceeded market expectation.  

Policy-wise, FOMC made a dovish announcement to maintain interest rate unchanged in March, which cut the number of expected rate hikes and lowered expectations regarding economic growth and inflation. PBoC has no monetary easing this month, while 7-day repo rate remained unchanged at 2.25%, indicating a clear attitude towards stable short-term interest rate. Throughout the month, liquidity has tightened, with inter-bank overnight and weighted average 7-day repo rate came in at 2.03% and 2.46%, up by 2bps and 4 bps respectively from last month.

From market aspect, 10-year CDB bond yield widened by 6 bps, while 10-year treasury yield tightened by 1 bps during March; medium-to-short end of yield curve had a relatively greater drop, which led to yield curve steepening. In March, 3-5 year credit bonds outperformed CDB bonds overall, while the performance for local government financial vehicles bonds was about the same as medium-term notes; AA rated bonds performed better than AAA rated bonds.

In terms of interest rate bond, the yield is more likely to go upward than downward in April. PBoC may want to maintain the stability of short-term open market interest rate, while the problem of relatively high short-term interest rate restricting long-term bond yield from going down cannot be solved easily. Besides, long-term interest rate bonds will also be negatively affected by increasing interest rate bond supply, short-term economic recovery and rising inflation. Good investment opportunities may appear after certain correction in long-term interest rate bonds. In terms of credit bonds, allocation demand has been strong given the large amount of outsourcing funds entering into the market, thus credit spread is expected to stay low. 

2015-11

From economic perspective, China’s October manufacturing PMI remained unchanged from the previous month and was below expectations at 49.8. This was the third consecutive month below the threshold, indicating that the manufacturing sector remained weak. New orders index was 50.3, up 0.1 from last month, showing a slightly improved domestic demand. New export orders index fell by 0.5 to 47.4, its lowest level since February 2013, indicating that the external demand continued to reduce. Production index fell by 0.1 to 52.2, which was at historical lows of the same period, confirming the coal consumption for power generation in October continued to decline. Employed person index dropped to 47.8, showing a growing pressure on employment. Raw material inventory index fell by 0.3 to 47.2 and hit the lowest level since October 2012. Finished goods inventory index rose by 0.4 to 47.2, resulting in high inventory levels, so the destocking process is still underway. Raw material purchase price index dropped by 1.4 to 44.4, a new low within eight months and the fifteenth consecutive month below the threshold, implying that the downward pressure on manufacturing price was still huge. In general, in the short term China’s economy still faces downward pressure, with monetary policy continuing to ease, fiscal policy in full swing, the economy may approach a periodic stabilization at year-end, but the downward pressure will be accelerated again in the first quarter of next year.
In terms of inflation, October CPI rose 1.3% YoY, a drop of 0.3% from last month, which was below market expectations. There is increased pressure of deflation.
Policy side, PBOC cut the interest rates and RRR again by 25BP respectively on October 23, while removing the deposit floating rate ceiling to accomplish interest rate liberalization. While the timing of PBOC ‘s action was beyond expectation, its main purpose for RRR cut was to hedge the decline of foreign currency deposits whilst that for rate cut was to lower the real interest rate and prevent deflation risk. The 7-day repo rate was lowered by 10BP to 2.35% on October 29, signaling that PBOC would continue to keep short-term interest rate steady and ease overall monetary policy.
For market performance, on the one hand, with the economy continued its downward trend, the central bank cut interest rate and RRR again, and the ample inflows of capital into the bond market, the yield of long-term interest rate bonds fell a lot, 25BP for 10-year China Development Bank (CDB) bonds and 20BP for 10-year sovereigns during the month; on the other hand, with ample market liquidity, the slide of short-term yield was slower than that of long-term yield, and yield curve began to flatten. 3-5 year credit bonds outperformed 3-5 year CDB bonds, urban construction investment bonds outperformed medium-term notes, and AA-rated bonds outperformed AAA-rated bonds.
In view of operation, the fund continued to sell some medium-term notes and corporate bonds that have accumulated quite large capital gains during the past, and the portfolio duration slightly lowered.
Looking ahead into November, in the short-term China’s economy continues to face numerous downward pressures. The growing deflationary pressure in October implies that the monetary easing is ongoing in China. The recent stock market rally has not fully restored the market risk appetite; with limited high-yield asset options available and notable decline of yields in bank wealth management together with its large reallocation pressure, capital still flows back into the bond market. If PBOC further guides the decline of short-term yield through open market operations, then it would provide space for long-term yield to drop again.
 

2015-09

From economic perspective, China’s official manufacturing PMI of August was 49.7, consistent with market expectations, which marked the lowest record since August 2012. Specifically, production index fell by 0.7 MoM, contributing the most (0.175) to the decline of PMI. Raw material inventory index fell from 48.4 to 48.3, showing that enterprises’ willingness to replenish inventories remained weak. Employed person index fell by 0.1 to 47.9, but there was insufficient evidence to conclude that employment condition deteriorated sharply. New orders index decreased by 0.2 to 49.7, which was below the threshold for two consecutive months after falling considerably in July. New export orders index dropped by 0.2 to 47.7, contracting for an 11th consecutive month. Although various steady growth policies have been released since the beginning of the year, the insufficient demands from both domestic and foreign markets were the largest constraint to economic recovery. Main raw material purchase price index increased slightly from 44.7 to 44.9, which was probably influenced by the increases in crude oil and other commodity prices in late August.
In terms of inflation, although international crude oil price has increased, the impact on CPI has been minimal so far.
Policy side, PBOC’s interest rates and reserve ratio cuts exceeded market expectation again. Meanwhile, the accelerated local government debt swap could provide space for the local government to add on leverage in the next stage.
For market performance, interest rate bonds outperformed credit bonds this month, and the previous too low credit spreads got restored. Due to the stock market slump, it is difficult to find appropriate investment opportunities, so large amounts of capital have flowed back into the bond market, eliminating negative factors in the short term.
Looking ahead to September, due to the seasonality patterns in Q3, the supply will be slightly more than in Q2, so the bond market will be suppressed from the supply side. On the other hand, with the equity market experiencing sharp adjustments, bond assets will become a safe haven due to the seesaw effect. Currently the market has not formed a strong momentum yet, so the government’s future steady growth policies should be closely watched.
 

2015-08

From economic perspective, the manufacturing PMI of July was down to 50.0 which was below the market expectation of 50.1, and the decreasing sub-indices indicated a weak manufacturing industry environment. The new orders index decreased slightly from 50.1 in June to 49.9 this month, the lowest in the past 34 months; new export orders index decreased from 48.2 to 47.9, indicating the weakening of both internal and external demands. The production index declined to 52.4 from 52.9 in June, a relatively low level in recent years, which confirming the drop of coal consumption for electric power in July, and the decline in enterprises’ willingness to expand production with a weakening demand. The raw material inventory index moved down to 48.4 from 48.7, and finished goods inventories decreased to 47.4 from 47.7. The inventory condition improved in short term amid faster inventory destocking process. The main raw material purchase price index decreased from 47.3 to 44.7, confirming that the prices of manufactured products have declined since July. China’s PPI for July fell at an accelerating pace than June.
From inflation perspective, pork prices have continuously increased over the past four months, but we don’t foresee the current CPI growth to surpass 2%. The inflationary pressures may come under control in Q4.
In view of policies, the CPC Central Committee has decided for fiscal policy to remain active and for monetary policy to stay prudent and balanced. So long as there is reasonable liquidity provided on the market, the importance of steady growth will be strengthened. There may be more fundamental infrastructure projects being started in the second half year, but the money market is expected to remain ample liquidity.
For market performance, the bond market rallied again in July, with credit bonds outperforming interest rate bonds. Currently the bond market has entered into a period of consolidation. Capital from stock IPOs has flowed back into the bond market, providing sufficient support from the demand side. From absolute value perspective, credit spreads are very tight now, only at one fourth of the historical level, indicating that high rated bonds have better value.
Looking ahead, due to the seasonality patterns in Q3, the supply will be slightly more than in Q2, so the bond market will be suppressed from the supply side. On the other hand, with the equity market experiencing sharp adjustments, bond assets will become a safe haven due to the seesaw effect. Currently the market has not formed a strong momentum yet, so the government’s future steady growth policies should be closely watched. If the market continues to rally, the fund will selectively reduce some positions with decent capital gains.

2015-07

From Economic perspective, the manufacturing PMI maintained at 50.2% in June and it was still above the neutral 50.0 mark for the fourth consecutive month. However, the PMI came in slightly lower than market expectation of 50.4%. Among the five sub-indices, the production index kept unchanged from the previous month, while the new orders, employment, and supplier delivery time indices retreated in June, but the raw material inventory index moved up. With demand slightly weak, both new orders and new export orders fell. The supply side was stable, and enterprise purchasing inventory activities were mild. The previous growth stabilizing policy led to a healthy performance in manufacturing enterprises activities, indicating that the manufacturing production was better than the market demands. - Inventories remained low overall but with both raw materials inventories and finished goods inventories increased, the destocking process has been slowed down to a certain extend. The Price Index further decreased with no improvement in industrial deflation.
Overall inflation pressure remains minimal for the moment.
Policy side, the central bank’s unexpected decision to cut interest rates and bank reserve requirement ratio on 27 June 2015, had been interpreted as an action that Chinese government is trying to stabilize the country’s stock market, so the yield curve was nearly flat. Since the one-year deposit rate has cut to 2%, the market appears to be attaching a very low probability to further cuts in interest rates.
From market performance, the current yield curve steepened obviously; short end benefited from loose liquidity, resulting in a decline in yields, but long end reflected the expectation of future economic stability, so the yield shifted up. The National Development and Reform Commission announced the new development projects at the end of June, showing the obvious trend that more fiscal policies will be coordinated to shore up economy. The market remains cautious on long end as the funding cost is relatively low. The curve riding effect is apparent in the market.
Looking ahead, due to seasonality in Q3 patterns, the supply will be slightly more than in Q2, so the bond market will be suppressed from the supply side. On the other hand, bond assets will become a safe haven due to seesaw effect, while the equity market was experiencing sharp adjustments.
 

2015-06

From Economic perspective, the manufacturing PMI rose to a six-month high at 50.2% in May, but still lower than the same period historical data. It is mainly due to lack of demand and high lending interest rate. The new orders index edged up to 50.6% from April’s 50.2%; the new export orders index rose to 48.9% from last month’s 48.1%, pointing that domestic and external demand may have improved slightly. Moreover, production Index continued to rise from 52.6% to 52.9%; even though the index hit a seven-month high as one of the major contributor to PMI recovery this month, it was still below the same period historical data, and only slightly surpassed the previous year record, indicating that there is still room for improvement. Raw materials inventory index was flat and finished goods inventory index fell to 47.5% from 48.0% in April, indicating that inventory improved in the short term with still high pressure of destocking. Purchasing price index rose to 49.4% from 47.8%, consolidating that the Port future price has risen as compared to the figure in April.
Overall inflation pressure remains minimal at the moment. The Ministry of Commerce released the consumer price in 36 medium and large sized cities. Generally speaking, pork price continued to rise but vegetable price fell rapidly.
Policy side, the central bank lowered interest rate again in early May, leading to ample liquidity in money market with 7-day repo rate below 2%. However, towards the end of May, news that the central bank has sold direct bond repurchase agreement to several commercial banks has led to a crash in the bond market. In fact, various loose monetary policies were idling in the financial system, resulting in the repo rate below the target; and too much might be read into the commercial banks’ proper behavior for their commercial interest. The central bank then launched a long-term PSL in favor of liquidity from short-term perspective; however, since the PSL is strictly controlled, the credit loan will be enhanced and the bond market will be suppressed from long-term perspective.
From market performance, the entire yield curve steepened obviously; short end benefited from loose liquidity, resulting in a decline in yields, but long end reflected the expectation of future economic stability, so the yield shifted up. The overall performance of interest rate bonds is worse than that of credit bonds.
From operation perspective, we continued to improve allocation towards higher return credit bonds in May, gradually adding the portfolio’s average duration.
Looking into June, as the introduction of local government debt squeezes the banks’ allocation, such impact will continue in the future ahead. The value of interest rate bonds is relatively low, so we will continue to focus on credit bonds to enjoy the carry.
 

2015-05

From economic perspective, April’s manufacturing PMI remained at 50.1% but slightly lower than the same period historical data, so a weak manufacturing sector is reflected. The small and medium enterprises PMI rose but still below the critical point, while the large enterprises PMI fell. The new orders index was 50.2%, unchanged from March, while the new export orders index fell to 48.1%, indicating a relatively weak domestic and external demand. Production Index rose to 52.6%, representing that manufacturing production continued to expand. Raw materials price index continued to rise while the raw materials inventory index increased as well. The employment index, on the other hand, dropped again. Overall, these indices show that the economy is still facing downward pressure, the central bank still has space to ease policy, and the trend of fiscal easing with credit easing remains unchanged. With the gradual release of previous policy effectiveness, we are expecting a high possibility of the bottom up of the economy in Q2.
Overall inflation pressure remains minimal at the moment. The piglet price fell 0.79% mom (after four consecutive months of increase), indicating that the rise of pork price requires sustainability, and no effect on CPI currently.
Policy side, the government recently released the solutions to swap local government debts by injecting liquidity into China Development Bank. Following the release of various monetary policies, there is a high probability that favorable fiscal policies will be introduced afterwards. At present, however, regulators’ concern over the overheated stock market also provides a favorable external condition for the bond market.
From market performance, as we expected, the short-term interest rate has declined significantly after the latest RRR cut in April, and the seven-day repo rate maintained at low level. However, due to the expected supply pressure of interest rate bonds, even with further easing anticipated in monetary policy, the relative value of interest rate bonds is lower than that of credit bonds. Currently, the spread of credit bonds is more attractive.
From operation perspective, we have increased allocation to higher return credit bonds in April, gradually adding the portfolio’s average duration.
Looking into May, as the yield of credit bonds is relatively high compared with repo rate, many market participants are using leverage to enjoy the carry. So overall speaking, the opportunity outweighs the risk in May.

2015-04

From economic perspective, March’s manufacturing PMI rose slightly to 50.1 from last month’s 49.9 as a result of seasonal effect. Since historical data indicates that March PMI is generally higher than annual average, the seasonal adjusted PMI suggested that enterprises are still in a recession cycle. Among the 12 sub-indices, there has been a drop in new orders, new export orders and material inventories compared to February, showing manufacturing industry is still facing great downward pressure; other indices have increased but mainly due to seasonal effect. So it appeared difficult to see a rebound trend in the economy in the future.
Overall inflation pressure is minimal at the moment, but pork price may increase in the following months with the end of de-stocking of sows, and thus may become a new variable for CPI.
Policy side, the government has released a series of easing monetary policies such as interest rate cut and required-reserve ratio (RRR) cut; real estate sales have been improving stimulated by positive policies such as lower down payment ratio and tax benefits, but the positive effects have not been transmitted to the production side yet. Under such easing policies, whether capital will flow into capital market and squeeze real economy, or form credit expansion to lower social financing cost, depends on regulatory control over capital market leverage and short-term interest rates.
From market point of view, bond yield curve has been steepening as we expected, but more has been reflected in the rise of long end interest rate. Bond market’s optimism has been corrected with better-than-expected credit data for three consecutive months; plus, concerns for increasing supply due to debt exchange program also lead to adjustments in both credit and interest rate bonds with yield level back to the beginning of the year.
Looking into April, bond market has entered into a relatively favorable value range given many bearish events being delivered already. High-frequency data shows credit data is weakening and unlikely to continue to beat market expectations; meanwhile, there is a large probability for PBOC to hedge the effects for introducing deposit insurance system by RRR cut.

 

2014-10

From economic data perspective, China’s Manufacturing PMI stood at 50.8% in October, a decline of 0.3 percentage points from September; it came below market consensus and was weaker than the historical average since 2010. This shows the driving force of Chinese economy has fallen again in October after a temporary stabilization in the earlier month. The weaker PMI was mainly due to slower export growth on the backdrop of a continuously weakening domestic demand.  The weaker overseas demand was echoed by a decline in PMI new export orders index, which went down by 0.3 percentage points to 49.9% in October; and the sluggish domestic demand continued with a prolonged decline of the new orders, imports and purchase of inputs indices in three consecutive months. In general, the China Manufacturing PMI suggests the Chinese economy is still hovering below recovery, which favors the bond market.
From inflation perspective, the market’s general consensus is that the October CPI will be in the range of 1.6-1.7%, continue to pointing to a lower inflation risk and creates more room for an easing monetary policy.
From the policy perspective, the PBOC has lowered the repo rate again in October and launched the Standing Lending Facility (SLF), leading to a positive performance of the bond market. It is widely anticipated now that the PBOC is sending easing signals to the market by moving to a progressive liquidity injection from the previous passive liquidity withdrawn, in order to hedge from the slippage of overseas liquidity and to lower financing rate for the economy.
From the market perspective, the bond market continued to move higher in the month. Credit bonds that once lagged behind have outperformed interest rate bonds, while the flattened yield curves for both credit bonds and financial bonds moved downwards rather significantly. 10-year financial bond yields declined around 170bps from this year’s peak and broke its 2013 troughs. Sluggish economic data, bond allocation demands from bank wealth management products and the strong easing expectation from the market were all factors led to the significant gain.
 

2014-09

From economic perspective, in September China Manufacturing PMI remained unchanged from last month at 51.1%, didn’t further decline as market expected, confirming again that the economy is in a weak stabilization process. The rebound of new export order index indicated that increasing foreign demand was still the main driven force for the recovery of the manufacturing sector, while the decreasing import index reflected that weak domestic demand was still holding back the recovery. Overall, though a mix of factors would have impacts on the economy, majority market views believe the economy has touched bottom in August and there is a good chance for month-on-month improvements later on. From policy perspective, PBoC continued to inject liquidity into the market and slightly brought down the repo rate. On 30 September, the PBoC and CBRC jointly published “Notice on Better Housing Financial Service”, which has eased property loan policy to improve financing limit on real estate. Considering that weak real estate market has been one of the biggest issues of the economy, the new policy may support real estate sector in the short-run and prevent the further downward trend of bond yields. From market perspective, bond market in September continued to move up following August trend due to PBoC’s easing policies, of which mid to long term interest rate bonds outperformed credit bonds. From operation perspective, we continued to manage the fund prudently. In September, we slightly increased allocation to 2-3 year high grade credit bonds by taking into consideration both the shape of yield curve and absolute return. The fund returned 0.58% (Class I) and 0.49% (Class A), underperformed ChinaBond Composite Total Return Index (1.14%). The fund announced a quarterly dividend of 0.08/unit at the end of September. Looking forward, we believe October’s economic data is very likely to have improvements from September. The current yield curve is quite flat with relatively high short-term yield, so may lead to a steepening trend in the future. We think the fund’s current duration is appropriate and will continue to focus on return from carry.
 

2014-07

From the economic data perspective, after the credit expansion of over one trillion in June, China’s  official PMI in July rebounded sharply by 0.7% from last month to 51.7% and the index picked up 0.6% after seasonal adjustment, indicating continuous improvement of the manufacturing sector. New export orders index rebounded by 0.5% while new orders index rebounded by 0.8%, showing that besides overseas demand, domestic demand has also acted as a significant stimulus for economic recovery. Raw materials inventory index increased by 1%, showing enterprises’ stronger desire for re-stocking.
From inflation perspective, July CPI increased by 2.3% YoY, same as last month, of which food price increased by 3.6% YoY, a decrease of 0.1% over last month, indicating that overall inflation situation is still mild. A modest inflation for Q3 is predicted due to the considerable growth rate of Q3 CPI YoY last year.
From policy perspective, even though the economic data indicated economic recovery, PBOC’s sudden cut in repo rate was still beyond expectation. Q2 Monetary Policy Report emphasized that the financing cost of real economy should be reduced effectively, showing that the government will pay more attention to the consistency and quality of policy when the economy is recovering.
From market structure perspective, bond yields experienced a trend of rising first and falling later in July, with PBOC cutting the repo rate as the turning point. We think the bond market is somewhat struggling at the moment given different factors affecting the market. Economic environment and inflation is unfavorable while the signal from PBOC favors the bond market.
Looking into August, credit data might be lower than that of June; the consistency of economic recovery data has yet to be confirmed, as some data may decrease by a certain degree due to the high base of last year. In terms of policy, Q2 Monetary Report indicates that high credit rate is the major obstacle suppressing credit expansion. The repo rate at Open Market Operations (“OMO”) decreased by 10bp during the last week of July, and the bond market can expect a small bull market if the OMO rate decrease continues. On the other hand, if PBOC policy stays balanced, then the bond market may face some adjustments considering the quarterly factor and MoM improvement of the economy.
 

2014-06

•From inflation and economic growth perspective, unfavorable movements of economic fundamentals since May, especially the sign of economic stabilization and rising inflation, have become two potential threats to the bond market. Firstly, May HSBC PMI and Manufacturing PMI both experienced an anti-seasonal rebound, with major sub-items all suggesting signs of economic stabilization; moreover, the rebound of PMI was also supported by the intermediate data such as electricity and crude steel outputs; it is also expected that May Industrial Production growth rate will slightly recover to 9% year-on-year (“YoY”). Secondly, May pork price rallied sharply and vegetable price turned up, pulling CPI up to 2.5% YoY. Thus, support to bond market from economic fundamentals is indeed weakening. Investors should pay close attention to social financing and real estates, as from the high-frequency loan data of the big four banks, new RMB loans may exceed 800 billion, partly offsetting the contraction of the off-balance sheet financing.
•From policy perspective, the State Council Executive Meeting announced on May 30th to strengthen the directional RRR cut and encourage banks to lend to related sectors through directional RRR cut and re-loan, in order to mitigate financing difficulties in real economy and reinforce the financial support to real economy. The announcement has sent a clear signal of easing fine tuning of monetary policy, making the market start to ignore the guiding significance of the central bank’s open market repo rate. Meanwhile, market liquidity was quite ample, so real money and fast money investors have both increased allocation to bonds, resulting in an obvious yield descending.
•From market performance, the sharp rising momentum in May mainly resulted from the effects of monetary policy adjustments and changing expectation of allocation institutions. Currently, 10-year financial bond rates have fell below 5% and 10-year treasury rate is approaching 4%, showing a relatively positive market sentiment.
•We maintained cautious in May and reduced holdings of some long duration interest rate bonds on rallies; combined with the effect of net inflows, the fund’s position level has been decreased. The fund returned 0.98% (Class I) and 0.89% (Class A), underperformed Chinabond Composite Total Return Index (1.51%).
•Looking into June, with financial institutions’ expectation of continuous easing policy being thoroughly enhanced and real economy being sluggish, the bond market is expected to continue this round of bull market. We will moderately increase allocation based on market opportunities and continue to focus on achieving stable return from carry. 

2014-04

  • HSBC China PMI closed at 48.1 (48.3 last month), RMB kept its slide but slowly reached 0.6% this month. Due to the slowdown of economic growth and deterioration of financing in China, the sales of property started declining in April, comparing to the same period last year, so are more observations of price correction.
  • 10 year treasury yield came down 7bps to 2.65% in April. In Asia, HSBC Asia High-Yield USD Bond Index rose 1.08% and HSBC Offshore RMB High Yield and Non-rated Index rebounded 1.07% in RMB term and 0.4% in USD term. CNH depreciated 0.6% again against USD. The fund returned 0.7% in USD, 1.4% in RMB and 0.47% in EUR in April.
  • RMB continued its weak performance, hovering in the lower bound, slid 0.6% in April. However the drop was refrained from the level of 6.3. Market focus will still be on the depreciation of RMB, affecting the performance of bond market as well. In April, Asia bond market rebounded from the low point in March, proving our view in the beginning of the year; 2014 is a volatile year for Asia bond market, and we expect to see more of the scenes like the performance from March to April. In April, primary market kept the momentum in printing new issues, however this time more investment grade than high yield bonds are issued given the short experience of rocky market since the start of this year. We will keep pursuing our investment philosophy; continuously seek opportunities in the manor of prudently assessing risk and cautiously analyzing trends to gain stable growth return.

2014-03

•March has not seen anything remarkable in macro environment. Manufacturing PMI increased slightly to 50.3% (Feb 50.2%), but was at historical low for March and even weaker than seasonal effect. To be specific, new orders decreased by 0.1% to the second lowest point in history, indicating a continuous downward trend for demand; product index fell by 0.1% from previous two months which was also at historical low for March; inventories of raw materials and finished products kept increasing while PPI dropped dramatically, indicating demand was still weak. Overall, economic downturn has come to a shocking moment, while CPI is still not a major concern.
•From policy perspective, policy makers were forced to show intention of “stabilizing growth” at the end of Q1 due to worse than expected macro data; new policies are expected to mainly rely on fiscal policy to increase expenditure; meanwhile, PBOC kept tightening liquidity to release a tough attitude; thus the two aspects together was negative to the bond market in the short term. However, borrowing cost went up for real economy as a result of PBOC’s tightening in 2013H2; de-stocking is clearly going on and the economy is in a slowly downward channel with lots of difficulty to recover. From a longer-term perspective, monetary policy will be needed in H2 in order to achieve a 7.5% GDP growth target.
•Due to uncertainties in policy expectations, the bond market slightly adjusted in March, with interest rate bonds adjusting more than credit bonds.
•We’ve slightly added the duration of the credit portfolio this month, increasing the weight of some quality enterprise bonds and medium-term notes. The fund returned -0.10% (Class I) and -0.10% (Class A), outperformed ChinaBond Composite Full Price Index (-0.48%). The fund declared dividend of RMB 0.05 per unit at the end of Q1.
•Selection of bond type will be crucial to future investments. We will continue to hold medium to high quality credit bonds to achieve good return from carry, and wait for the big opportunity in the bond market to come.

2014-02

•Manufacturing PMI experienced seasonal decline in Jan to 50.5, slightly lower than market expectation. Among which, production indices had relatively good performance, while demand and purchasing categories were weak with low inventory level,  indicating enterprises didn’t have enough motivation to purchase given weak demand, and thus were converting existing orders directly into production without increasing inventory; as a result, prices of upstream raw materials stayed low.
•As predicted by many institutions, Jan CPI growth is likely to slow down for four consecutive months to 2.3% (lower than 2.5% in Dec 2013); that was due to the fall in pork prices (which is reverse to seasonal trend) and weak economic recovery. The economy has not shown any sign of re-emergence and if this continues, it will increase the possibility of a lower than 3% CPI for three consecutive years in 2014; in fact, many institutions have already lowered their estimation of 2014 CPI.
•PBoC modestly released some liquidity in Jan as Spring Festival approached in order to maintain harmonious festival atmosphere, but we will have to wait until February when PBoC’s action will have more reference value after observing Jan’s credit data and the negative effect brought by QE tapering on emerging markets.
•From the market perspective, Jan was a small bull market reflected in each duration and category. Small to medium institutions represented by city commercial banks showed clear willingness to allocate more assets to bonds, while all kinds of agencies joined the buying league. From the yield curve perspective, it’s getting steeper from Dec’s very flat shape with short-end trending down. Among which, products within 3-year trended down the most while 3-year and 5-year are the steepest. Current market demand is mostly from allocation needs as commercial banks’ priority is to match assets with liabilities. A bigger market opportunity will arise when PBoC’s action shows fundamental change.
•Thanks to relatively large amount of net subscription in Jan, we seized market opportunity and made some good allocation. The Fund returned 0.80% (Class I) and 0.71% (Class A), in line with ChinaBond Composite Full Price Index (0.79%).
•We will adjust the fund’s duration with reference to PBoC’s action next month. We will still focus on return from carry while controlling credit risk properly.

2013-12

Economics: Dec official PMI was 51 (last month 51.4), lower than market expectation of 51.2 and seasonal pattern, and a MOM drop for two consecutive months. Dec HSBC PMI was 50.5 (last month 50.8) with preview of 50.5, the lowest in three months. All sub-indicators in Manufacturing PMI declined except for purchasing price, indicating the growth momentum since third quarter led by real estate, automobiles and infrastructure has peaked already and started to decline again.

Inflation: Dec CPI is 2.5%, 0.5% lower than last month and below market expectation of 2.7%, mainly caused by 1.7% MOM decrease in food price.

Liquidity: In Dec, seasonal effects lead to increased liquidity demand; abnormal fiscal injection and rising cautiousness in the market; plus more liquidity control from the central bank, all caused very tight liquidity conditions within the interbank market. 7D repo rose from 4.5% in Nov to 5.4% in Dec. Central bank’s repurchase action on the last day of Dec signaled that it is unlikely to expect a low level funding cost in near future.

Market Outlook: China's bond market stands at a historical turning point. New things like preferred stock, non-standard assets’ material defaults and internet finance are all likely to bring shocks to the market; however, the core conflict is still the problem of leverage within real economy and financial system. Triggering events may be: 1. The regulation of shadow banking by the “No. 107 Document” introduced by PBOC, CBRC, CSRC and CIRC; 2. Central bank injects liquidity if the real economy is dragged down by capital chain problems; 3. Credit risk exposes in trust or brokerage channels. These three factors may trigger a significant market movement, but neutral might be the best choice until that happened; especially when the yields are all at historical highs. Carry will still be the main source of return of our fund.

Investment Strategy: We are well prepared for credit risk control, so interest rate risk will be the main consideration. In terms of bond types and duration selection, we will adjust the current portfolio according to supply/demand pressure in the short-term and economic and policy changes in the mid to long-term, aiming to bring satisfied return for our investors in 2014.

2013-11

•       Economic environment: November PMI flat at 51.4 but the structure shows a slow economy recovery progress. Inflation hasn’t negatively impacted the bond market yet. Central bank’s resumption of reverse repo is positive to bond market while preferred shares and new IPO schemes negative.

•       Bond market: Substantial correction during early and mid November due to tightening liquidity and imbalanced supply-demand situation. Sovereign yields of various durations reached eight-year record high since March 2005. It was not until late November when bond yields started moving downward, especially for medium and long term bonds. Interest rate bonds finally showed signs of stabilizing, and market confidence was restored to certain extent.

•       Fund performance: The fund slightly added some positions during the market slip.

•       Market outlook: Investments should still be conducted in a conservative manner as the current yield curve remains flat, but we should focus on the gradual accumulation of positive factors in the bear market, including economic, monetary policy and liquidity, regulatory and market factors. The current high interest rate level helped to restore the imbalanced supply and demand situation. There is limited room of further declines of credit bonds.

•       Investment strategy: We would still invest ahead of market consensus. For bonds with attractive yields, we would carefully select high quality ones, invest at appropriate time, and focus on return from carry/

2013-10

Economic data: October PMI 51.4% is higher than market expectations, showing a mild recovery; September CPI exceeded the key level 3%; central bank remained a neutral and relatively tight monetary policy. These factors made October one of those months with largest bond market drop in recent five years.

Bond market: The historically high supply of interest rate bonds and credit bonds in October and weaker than expected demand created an imbalanced supply-demand situation. Yields continued to rise as a result.

Fund performance: The Fund added some long term bonds, increasing the portfolio duration to a small extent.

Market outlook: Liquidity is expected to ease in November with money market rates falling back. The imbalanced supply and demand situation for interest rate bonds would be restored to a certain extent while credit bonds still face a large supply pressure. There won’t be obvious swing trading opportunities. Also the Third Plenary Session of the 18th Central Committee of the Communist Party would reveal the governing philosophy of the new government to investors.

Investment strategy: we would invest ahead of the market consensus. For newly issued corporate bonds, we would carefully select high quality bonds, invest at an appropriate time, and focus on return from carry.

2013-09

Economic data: September PMI of 51.1 was lower than market expectations; Exports/GDP reaching 25% showed external demand’s strong support to economic growth; domestic demand weakened further.

Economic trend: Accelerating economic downturn in late September and market concerns over October economy supported the bond market, while the potential 3% September CPI increased inflation pressure.

Market review: The bond market entered a little bull market given low supply and market concerns over economy. Yields of interest rate bonds stabilized with 10-15 bps declines. Investment value of credit bonds emerged after absolute return increased to an attractive level.

Market outlook: The Third Plenary Session of the 18th Central Committee of the Communist Party will have a large effect on the bond market.

2013-08

In August, China’s central bank continued its open market operations to “inject short term liquidity into market while controlling long term liquidity”, leading to relatively more eased money market liquidity compared with July. With the 10yr treasury yield surging above 4%, absolute value of interest rate bonds emerged. Later, market confidence was restored to some extent thanks to participation of bank investors. Yields of interest rate bonds stabilized, ending the unilateral upward trend. As yields of credit bonds continued to rise, credit spreads widened. Although yields of some high quality credit bonds are close to loan rates, which are attractive to some investors, as market expects a large supply of corporate bonds in Q4, we still hold a conservative view towards credit bonds.

From an economic data perspective, August PMI rebounded to 51, exceeding market expectation of 50.6, reflecting an obvious overall economic recovery trend. From a data breakdown perspective, new orders index and new export orders index rose by 1.8% and 1.2% respectively, indicating both domestic and overseas demands are picking up; output index increased by 0.2% to 52.6, showing that corporations are more willing to produce as demands warm up. Overall, economic recovery since August would sustain for a while and inflation would remain stable.

2013-07

In July, China’s central bank injected liquidity into market through reverse repurchase operations. This has eased the market’s liquidity concerns, demonstrating that the central bank maintains its neutral monetary policy. On July 22nd, Premier Li Keqiang said “the floor of GDP annual growth rate is 7.5%, bottom line is 7% and the cap of inflation is 3.5%”. This has weakened expectations of economic slowdown, which is the pillar to bull bond market. As a result, interest rate bonds and credit bonds saw price adjustments of varying degrees, of which longer duration bonds corrected more than shorter duration bonds.
From economic data perspective, July PMI rebounded to 50.3 from 50.1 in June, exceeding market expectations, showing signs that the economy may stabilize to some extent. From CPI and PPI data perspective, price rebounding could be another factor preventing the central bank from releasing liquidity. We expect both policy and liquidity to remain neutral in the near future. From a micro perspective, corporate profitability continues to deteriorate; ratings of low quality credit bonds are revised down; adjustments of credit bonds would go on.

2013-06

Since mid-June interbank liquidity has become tightened due to seasonality and drop of inflow of foreign funds. However, the central bank continued to issue bills rather than taking actions to inject liquidity, which caused a panic in the market. Late June saw a record high money market rate in recent five years, with 1-day repo rate as high as 10% and credit bond yields sharply climbing. It was sensed by the market and later confirmed by the central bank that as rapid rise of banks’ off-balance sheet assets is against the prudent monetary policy, the central bank decided to allow interest rate to hike so that financial institutions would be pushed to adjust asset allocation and deleverage.
  
June PMI fell to 50.1, dropping by 0.7 from last month. Though still remaining above 50, it implied a lack of momentum of economic recovery. Without policy stimulating, it is hard for the economy to pick up. Moreover, with June CPI at 2.7% and PPI -2.7%, there’s still not much pressure of inflation. From a policy perspective, the new government holds a higher tolerance for continuing economic downturn and pays more attention to avoiding financial systematic risk under an economic restructure circumstance. Therefore the market’s expectation for policy easing failed. Furthermore, with this round of “investor education”, interest rates may revise up. Though the current yield level is supported fundamentally, some investors would have to deleverage on liquidity concerns. From a technical analysis perspective, the current credit spread remains at historically low level, which reflects a low credit risk premium. Since late June, several rating agencies have downgraded some companies’ ratings and it indicates that the current credit spread does not fully reflect the real spread between rating classes. Taking into account that yield may rise owing to the potential increase of supply in the future as well as other issues, we will continue to select credit bonds cautiously, engage in interest rate bonds appropriately, keep the portfolio’s average duration low and focus on return from carry.

2013-05

April’s economic data published in May reflected a weak economic recovery and stabilized price level. Liquidity in the inter-bank market was ample during the first half of May, but became tightened in the later part of the month. To hedge the continuous inflows of funds outstanding for foreign exchange, the Central Bank restarted the issuance of 3 month PBoC bills. The bond market, especially credit bonds, moved up again and recovered most of the losses caused by the negative impact of previous regulatory turmoil. Yields of interest rate bonds remained relatively stable, with those of medium to long term financial bonds slightly tightened.
In June, as estimated by various medium and macro data, we expect a weak economic recovery and mild inflation to continue to support the bond market. We also expect the macro policy to remain stable, as the government’s tolerance for lower economic growth has been improved to emphasize on structural reforms and economic transition. In June, it is expected that market liquidity will be tighter due to end-of-quarter effect and the negative impact on funds outstanding for foreign exchange caused by “SAFE Notice on Strengthening Foreign Exchange Management”. Currently, credit bonds are overvalued and may face relatively high risk with decreasing liquidity.

2013-04

Market liquidity remained ample during the first half of April. Due to the new regulation on banks’ wealth management products imposed by the China Banking Regulatory Commission, demand for credit bonds remained high and bond yields showed a clear downtrend. However, in the later part of the month, when regulators started to rectify the interbank bond market and some market participants started to deleverage as a result, bond yields have risen substantially.
China’s April PMI was 50.6, a retreat of 0.3 percentage points from the month before. It showed that the strength of economic recovery was still weak. As inflation pressure remained mild in general, monetary policy and market liquidity are expected to stay stable; as a result, the bond market is unlikely to face a big correction risk. The recent regulatory turmoil, which aims to regulate and standardize market practice, may cause market deleveraging in the short term, but the effects should be neutral in the medium term. However, from a technical point of view, the current historically low credit spreads only reflect a very low credit risk premium. As a result, any increase in supply, or slowdown in demand, or tightening in liquidity going forward may cause yields to rise. We will continue to select credit bonds cautiously while controlling the duration of the portfolio to focus on return from carry.

2013-03

For the most part of March, the bond market experienced a moderate correction. Although ample liquidity provided some support to the market and prevented the risk-free yield curve from a further upward shift, the credit spreads widened due to lower demand for credit bonds during the quarter-end and concerns over a gradual tightening monetary policy. The market didn’t rebound until the end of March, when the new regulation on banks’ financial products by the China Banking Regulatory Commission was regarded as a plus to the bond market. 

China’s March PMI was 50.9, rising 0.8% from the month before. However, the magnitude of the rise was weaker compared with the same periods in the past years, showing signs of a weakening economic recovery. CPI in March was 2.1%, lower than market expectations, and is probably the bottom of the year. In terms of market liquidity, it is expected to remain ample in April with a possibility of slight tightening later in the month. Looking forward, we believe that the short-term large correction risk in the bond market is low. However, in the medium to long term, economic and inflationary factors are not bullish for the bond market. Also the current historically low credit spreads only reflect a very low credit risk premium. As a result, any increase in supply, slowdown in demand, or tightening in liquidity going forward may cause yields to rise. We will continue to select credit bonds cautiously while controlling the duration of the portfolio to focus on return from carry.

2013-02

In February before Chinese New Year, liquidity remained ample while yields of interest rate bonds and credit bonds continued to tighten. After Chinese New Year, PBOC’s open market operation switched from reverse repos to repos. This changed the state of market liquidity and bond yields rose moderately following the repo rate. 

In February, both PMI and HSBC PMI dropped to a level lower than market expectations, but still above the critical line of 50, which reaffirmed our view that the economy is still in a weak recovery. In terms of market liquidity, PBOC’s continuing interruptions on reverse repo operations have changed the market expectation on future market liquidity, and it is now believed that the peak of market liquidity has passed. Looking forward, we believe that the risk of large corrections in the bond market is still low. However, in the medium to long term, economic and inflationary factors are not bullish for the bond market, and the implied credit risk premium has been relatively low. Therefore, any increase in supply, decrease in demand or fall in liquidity in the future may cause yields to rise.

2013-01

Economic data released in January has met the general market expectations, while the overwhelmed ample liquidity and strong demand for bonds at the beginning of the year has led to another rally in the bond market. During the month, yield curves of interest rate bonds and credit bonds displayed a steeper downward trend while credit bonds with mid to low ratings performed the best.

Due to the Chinese New Year holidays in February, the release of some macroeconomic data will be postponed to March, and other data to be released will be largely disturbed by the holiday effect. Based on current situation, we conceive that China’s economy is still in a slow recovery. Liquidity in February and March in the inter-bank market is expected to continue to be strong. Looking forward, we believe the correction risk in bond market is low in the near term with the support of good market liquidity. However, in the medium to long term, economic and inflationary factors are not bullish for the bond market, and the implied credit risk premium has been relatively low. Therefore, any increase in supply of credits or decrease in demand in the future may cause yields to rise.

2012-12

Most of the economic data released in December has met the market expectations, and bond market investors have become more cautious with improving industrial value added and HSBC Flash PMI. In addition, the boom of domestic stock market has brought forth concerns of major asset re-allocation, while the Central Economic Work Conference’s decision to continue with a proactive fiscal policy and a prudent monetary policy has demonstrated the decision-makers’ intention to maintain a neutral monetary policy. Market liquidity in December was better than the previous two year-ends, as overnight rate and 7-day repo rate remained relatively stable. The bond market ended smoothly for the year, with the yields of interest rate bonds and credit bonds slightly fluctuated and trended upward.

In January, we expect the macroeconomic data of China will continue to show a slow recovery pattern in economic growth. CPI in December is expected to be around 2.4%, so inflation still will not serve as a key influence to the market. Liquidity in the first quarter of 2013 is expected to be relatively stable, though there might be some fluctuations in January due to the Chinese new year effect. New credit bond supply will experience a seasonal decrease while demand will remain strong. Credit bond investments will continue to generate good coupon incomes, but investors are advised to pay more attention to the credit risks within certain industries and companies.

2012-11

In November, as the fundamentals of short-term economic bottoming have not changed, coupled with very stable money market liquidity, the volatility of the bond market was quite low. This month, we continued to gradually increase the duration of our credit portfolio to enjoy higher carry.

In December, we expect the macroeconomic data will continue to show the slow recovery of the economy and the modest pick-up in inflation, while PBOC will continue to ease the year-end tight liquidity with reverse-repo purchases.

Hence, the bond market is expected to experience a mild fluctuation. Credit bonds now possess better value for carry, but given the pressure of supply, yields will not tend to trend downward. We expect the credit bonds will continue to fluctuate in December and we plan to gradually increase the duration of credit bonds during the time.

2012-10

Economic data announced in October were better than or flat to the market’s expectations. The stabilization of these data cast adjustment pressures on interest rate bonds and high grade credit bonds. However, amid the easing of concerns over credit risk, yields of medium to low grade credit bonds continued to decline slightly. Overall speaking, credit bonds have been stabilized after a substantial adjustment in the third quarter. This month we gradually increased the duration of our credit portfolio to enjoy higher carry.

In November, we expect the macroeconomic data will continue to show the bottoming of the economy and the stabilization of the inflation, while market liquidity will remain moderately loose. Hence, the bond market is expected to experience a mild fluctuation. Credit bonds now possess better value for carry, but given the pressure of supply, yields are difficult to trend downward. We expect the credit bonds will still fluctuate in November and we plan to gradually increase the duration of credit bonds during the time.

2012-09

In September, the PBOC has yet reduced the RRR and the QE3 has caused more inflation concerns with August CPI rebounded to 2%. Amid concerns over tighter liquidity due to quarter-end effect, the bond market continued its trend of correction since July, until later in the month when bond yields began to retreat due to the PBOC’s large scale reverse-repurchase program.

The bond yields recorded a slight rise in September. This month our portfolio maintained the conservative strategy with shorter duration and lower overall risk to reduce the effect of market volatility on the fund’s NAV.

China's September PMI was 49.8, 0.6% higher than August. However, it is the first time since inception of the indicator that the data is below the threshold of 50.0 in the month of September, an implication that the current economic growth is still weak. We expect the inflation concern will be eased with September CPI falls in between 1.9% and 2%.

Previously we employed a defensive strategy with shorter duration to avoid the drop in bond market. We believe the risk of bond market correction has relieved significantly in the third quarter and the credit bond yields now present better allocation value now. However, credit bonds are still facing the pressure of increasing supply. In the fourth quarter, we expect credit bonds to fluctuate within a narrow range, and we plan to gradually increase the portfolio duration during the time.

-0001-11

In August, China’s central bank continued its open market operations to “inject short term liquidity into market while controlling long term liquidity”, leading to relatively more eased money market liquidity compared with July. With the 10yr treasury yield surging above 4%, absolute value of interest rate bonds emerged. Later, market confidence was restored to some extent thanks to participation of bank investors. Yields of interest rate bonds stabilized, ending the unilateral upward trend. As yields of credit bonds continued to rise, credit spreads widened. Although yields of some high quality credit bonds are close to loan rates, which are attractive to some investors, as market expects a large supply of corporate bonds in Q4, we still hold a conservative view towards credit bonds.

From an economic data perspective, August PMI rebounded to 51, exceeding market expectation of 50.6, reflecting an obvious overall economic recovery trend. From a data breakdown perspective, new orders index and new export orders index rose by 1.8% and 1.2% respectively, indicating both domestic and overseas demands are picking up; output index increased by 0.2% to 52.6, showing that corporations are more willing to produce as demands warm up. Overall, economic recovery since August would sustain for a while and inflation would remain stable.

2016-12

As the Fed hiked interest rates, RMB continues to depreciate, and there were little changes in bond prices due to the quiet year-end market. Affected by RMB depreciation and the tightening of onshore funding, offshore RMB liquidity tightened again with short-term interest rates climbing to a high point.

Starting from the new year, Chinese citizens’ annual foreign-exchange quotas will reset which may further increase RMB depreciation pressure. We can see capital controls has tightened significantly recently, which signals the government intends to control the rate of depreciation, however, this could exacerbate the market distortions and accumulate risks. We expect RMB to continue to depreciate in 2017. The pace of US interest rate hikes in 2017 will be affected by both Trump’s actual policy effect and the impact of global recovery, therefore, the Fed will not be too radical during the first quarter, and interest rates may fluctuate around the current level. However, the low credit spreads in this round of adjustment may unavoidably rise: supply and demand situation and confidence will lead to its occurrence.

We expect a large number of new bonds issuance in the first quarter of 2017. High-yield side, more issuers will return to the offshore market as China's onshore real estate financing tightens and capital outflow is restricted. In conclusion, Chinese issuers will continue to dominate the supply. However, as the demand, especially for the bonds that rely on domestic demand, may not be strong enough for the increasing supply, investors become more sensitive and conservative, and the yield will have upside.


 

2016-11

Trump's victory in the US presidential election triggered huge volatilities in the bond market. Over his campaign, Trump has identified various expansionary fiscal policies including further infrastructure developments and tax cuts, which led to higher expectations for inflation. Market expects an interest rate hike by Fed is approaching, US treasury yield went up, USD strengthened and capital has been flowing out of emerging market.  As an effect, RMB depreciated against USD, depreciation and capital outflow pressure exacerbated.  Regulators further restricted capital control and offshore RMB is negatively impacted.

Despite the spread stays relatively stable, as the yield for US treasury rises at an accelerating rate, price for long duration bonds fell significantly. Chinese bond appeared to be defensive, comparing to other countries, technical level for high yield bond is still supportive. Currently, investors will wait and see the trend for US treasury yield; more allocation will be made after the situation stabilizes. High yield bond with short duration have demand support. As the year-end approaches, issuance of new bond will show down, market will likely to gradually stabilize after the Fed interest rate hike.

2016-09

Offshore RMB funding cost increased significantly recently and was just below the record high in January this year; however, the rate decreased rapidly towards the end of the month. The volatility might be due to PBoC’s intervention which was in order to support the foreign exchange rate, as the SDR inclusion will go effective soon and the expectation for Fed’s rate hike. However, the tightening liquidity didn’t affect offshore RMB bond market, which was kept in balance with limited supplies.

Fed announced to keep the interest rate unchanged during September FOMC meeting, alleviating the correction caused by market concerns. We believe that the U.S. economic and employment data are good enough to support an interest rate hike in December. U.S. Treasury yield may continue to fluctuate in a range bound. In the short term, depreciation pressure for RMB has been relieved.

We have seen high yield bond issuances by real estate companies recently. The purpose was to issue new bonds while buying back old bonds which had higher coupon rates. As onshore bond issuances became more difficult, offshore bond supply will increase further, which might hurt the secondary market. Therefore, we look to focus on bonds that could be redeemed in the short term, and wait for market correction opportunities.

We kept the investment portfolio’s short duration unchanged, and increased allocation to real estate bonds that can be redeemed in the short-term to achieve steady returns. At the same time, we continued to keep a high proportion of USD denominated bonds.

2016-08

The recent speech given by Chairman of US Federal Reserve Yellen indicated a higher possibility of rate hike within the year. We believe there might be maximum one rate hike by year end; the timing would be decided by economy trend and election. The US treasury yield may go up consequently, and emerging market such as Asia bonds may face pressure.

Offshore RMB bond primary market remained subdued with only a few issuances; the expansion of onshore panda debt has a shunt effect due to lower financing cost. We expect new bond supply to remain low, which is beneficial to secondary market prices. In terms of US dollar bonds, seasonal new supply will be increased in September, concentrating on new issuances by quasi-municipal enterprises and real estate companies. Overall, yield pressure given by supply will be limited, especially because quasi-municipal bonds will be supported by domestic capitals; but we need to stay cautious on real-estate bonds which are impacted by tightening financing policies onshore.  In the medium-term, Chinese enterprises will continue to suffer from the downward trend economy, with little improvements on credit situations. Given the expectation for US rate hike, we hold a neutral to partially conservative view on Asian bond market. Credit spread may widen in near future, and high yield bonds may have adjustments.

2016-07

U.S. interest rate hike is expected to be postponed again. The yield chasing market has led to a rise in Asian high yield bond market. FOMC in July continued to maintain interest rates unchanged, while GDP growth of the United States in Q2 was only 1.2%; we maintain our view that there will be at most one interest rate hike this year. The expectation for U.S. interest rate hike is declining, making long-term Treasury bond yields at low levels.

Asian, especially Chinese USD denominated bond market, continued to be highly demand driven, and prices continue to increase. Recently we can see some increase in supply, including some insurance from real estate names. We expect the supply of bonds with Chinese name will increase in the second half of the year. On the one hand, the domestic debt financing quota for real estate companies is running out, which will drive the companies to return to the USD denominated bond market; on the other hand, insurance of city construction investment bonds will continue. Overall, the supply will put some pressure on the yield, city construction investment bonds will perform better than the real estate bonds. With the market going into the off-season, the decline in turnover may result bond prices to remain at the current high level, thus holding will be a better strategy.

2016-06

Affected by Brexit, RMB had the largest depreciation against USD of the year. For debt market, we see this is a one-off correction on upwards trend. US 10yr quickly touched historical low 1.4% but bounced back afterwards. When we look at Asian USD denominated debt especially Chinese names, the spread does widen but the absolute yield remains at the same level which brings no impact on mark-to-market value.

Our in-house view on Brexit is that it will bring uncertainty for sure and Fed at most will raise rate once before end of 2016. The rest of the central banks will remain a loose monetary policy or more QE is expected. Whilst RMB has been depreciating, offshore financing cost is at the lowest level of the year, offshore RMB denominated bonds may remain stable or trend upwards with little chance of a deep correction similar to last year after the exchange rate reform. High yield is not cheap, but short term technical analysis shows a strong support. However, from fundamental point of view, the credit outlook is still worsening, we expects a price adjustment in the near future. Therefore, we will selectively allocate to a few names and closely monitor the financials of the companies and the onshore financing conditions.

After half year strong performance, we hold a neutral view for future market, and buy recommendation for short term, especially for investment grade. Local government PPP is booming with huge amount issuing, it may become a very important sector in terms of Chinese debt market. Current PPP pricing is not fully mark to market; some of those names may valid for relative value trade, and undervaluation exists among city construction investment bonds with high yields. 

2016-05

Expectation of a mid-year interest rate rise is getting stronger, leading to weaker RMB. However, offshore RMB bond market is still going up due to limited supply of offshore bonds issuances.

Chinese government issued RMB bonds in London for the first time at end of May. Issuance of corporate bonds is still at a frozen period, more bonds are getting matured than being issued, which led investors to keep buying bonds. Currently, RMB depreciation pressure would limit the upside of the market or even lead to a small correction; however, we don’t think a dramatic drop in currency value would re-appear.

Asia USD-dominated bonds trended upwards with volatilities, however, the rate of increase slowed down. The main reasons were higher supply and expectation of a mid-year interest rate rise. Oil price kept to rebound, which led to an increase in high yield bonds. We believe the market may face some pressures to a correction after this round of rebound, but the range would be limited. Stronger USD would put pressure on emerging market capital and commodities; however, high yield bonds in Asia especially in China will benefit due to the lack of supply. Another concern we have is the weak fundamentals. We will closely monitor whether onshore financing regulations will tighten further.

2016-04

The stabilization of RMB exchange rate and the imbalance between supply and demand continued to push offshore RMB bond to rebound, while high yield bonds benefited from rising oil price. After RMB was converted to refer to a basket of currencies, we saw a weaker US dollar this year and RMB exchange rate index went lower, thus RMB is actually facing some appreciation pressure, while the recent trend was relatively stable. The stabilization of RMB exchange rate brings support to CNH bonds, especially foreign name bonds. Chinese state-owned bonds continued to be dominated by allocation demand of onshore capitals, with price steadily rising.

After a long silence, the primary market has finally seen transactions. The Hungarian government issued the first RMB bond, and obtained relatively good subscription. Overall, matured bonds are greater in size than new issuances, market size is shrinking. We believe this is not conducive to the development of the market, and Chinese government should adopt policies to support the internationalization of RMB.

Driven by strong technical, Asian US dollar bonds continued the upward momentum, while Fed’s decision on rate hike in June still depends on data. As oil prices continued to rebound, market risk appetite has increased, thus high yield bonds benefited. We believe technical factor has become the main driving force, while valuation has already exceeded fundamentals. In the near future, credit spreads may remain low, but the risk for adjustments has been cumulating. High yield bonds that have enjoyed big increase previously are more likely to have retracements, and high-risk securities should be avoided from industry perspective.

2016-03

Benefitting from stable exchange rate and limited supply, offshore RMB denominated bond started to rebound. In 2016, very few RMB denominated bonds were issued offshore, which has attracted many onshore capitals to flow into this market given its higher yield compared to onshore. RMB exchange rate started to stabilize and slightly appreciated, easing the trend for capital outflow. Unexpected dovish tone from the Fed suppressed USD exchange rate; market has been slowly digesting the impact from the expectation of RMB depreciation. Supported by the rebound and stabilization of oil price, capitals started to flow into risky assets, with yield for high yield bonds increased dramatically during March. The strong allocation demand for high yield bonds from investors offset the concerns over weak fundamentals and downgrade of credit ratings.

We believe the macro environment and supply and demand structure will stay favorable to the bond market in short term. Fed won’t have another possible interest rate hike until June, along with stabilization of oil price, emerging markets assets will benefit. Offshore bond supply will stay limited and cannot recover in short run; supply for USD-denominated bonds issued by Chinese companies has been limited as well; thus, supply and demand structure is favorable to the bond market. However, we should stay alert to medium term risks including the weak economic fundamentals, and deteriorating credit qualities of bonds and bank fundamentals. Moody’s and Standard & Poor's both lowered outlook on China’s credit rating to negative, and Chinese government’s stimulus policies haven’t brought back the economic growth. Taking all factors into account, the portfolio emphasizes on credit analysis and prefers to invest in high yield bonds with shorter durations.
 

2015-11

The Fed seems to hike in December. Though the market is pricing in the liftoff much, the path to a rate hike is strewn with uncertainties. In general, the hike may be negative for Asia currencies and bonds. Before year end, we think sentiment will continue to be eroded by two major themes that show no signs of changing – the China growth decline and US Fed monetary policy. However, we think China credit will be well positioned for the ongoing domestic monetary easing and constrained new bond supply.
PBOC cut the interest rates and RRR again in end Oct. The monetary stimulus is to boost the credit growth while prevent the deflation risk. Huge capital outflow after RMB devaluation also urged liquidity injection. The highlight of the cut was the removal of deposit rates ceiling, meaning the accomplishment of interest rate liberalization. We expect PBOC to cut RRR further in the coming months. For the currency, we expect RMB will get support for SDR evaluation. However, rising costs of hedging RMB risk, both off- and onshore, will contribute to a new risk premium for RMB asset investors.
The yield spread between onshore and offshore attracted decent onshore flows for CNH markets, esp. for SOE bonds. The market nearly recovered the loss after RMB devaluation. With the lowering yield, onshore money went downwards the credit curve, into second tier central SOEs and local SOEs. Lack of meaningful supply, we think the prices will keep steady or move higher.
 

2015-09

All the focus was RMB in last month. The offshore RMB market was heavily hit by the unexpected RMB devaluation on 11 August. The YTD total return (in RMB) evaporated more than a half in the following two weeks. CNH funding got squeezed with overnight rate hit over 20% before the liquidity injection Hong Kong Monetary Authority. The turmoil also spread to other EMs like Malaysia and Indonesia. Negative sentiment persisted, reinforcing the downward spiral of asset prices. However, the Asia USD especially China HY property held on well.
We think the currency devaluation is a one-off adjustment rather than beginning of depreciation trend. The enlarged trade surplus and the coming SDR evaluation will both support RMB FX. More importantly, PBOC will not permit a sharp depreciation which may hurt the financial system stability. The limit PBOC can bear may be 5%-10%. Thus, it is a good entry point to invest in RMB if it is overshooting.
After the further onshore monetary easing of rates/RRR cut, we think market will gradually recover. Fed hike is still the key risk source. From valuation side, CNH bonds is now attractive than USD bonds. Some China HY names will be under downgrade pressure for poor interim results.
 

2015-08

The US Federal Reserve announced to leave the current interest rate unchanged in July conference, and the market is still expecting a rate rise by the end of the year.  The overall US economic data has improved but recent economic condition appeared to be challenging, so make it harder to anticipate Fed’s decision in September, while citing the volatility in Greek and Chinese markets. The US dollar maintained a strong currency, and US 10-year Treasury bond yield will expect to trade range-bound. As for the Greek crisis, the debt payment to the European Central Bank in mid-August acts as a decisive event, and we would not be surprised if it continues to point out the country’s exit from the eurozone in the next few months. In short, the Greek crisis would have a limited impact on Asian bond market.
China PMI data declined in July, and the market shifted more focus to the price of pork when it hit a four-year peak. We believe that the inflation won’t be expected to rebound at this point, seeing that commodity price has led to a low PPI; China might ease monetary policy further within this year, and fiscal policy will lead to more positive effects.
The CNH market is affected by the volatility in China A-Share. The intervention taken by Chinese government has led the offshore CNH exchange rate to decline, which especially impacted broker names the most but rebounded shortly afterwards. Compared with previous months, the bond market shifted down slightly in July, and the primary market was still liquid with a balance trading condition prior to the slack season. The current valuation maintained at a reasonable level, so we expect the half-year reports to deliver an overall picture of weak performance for Chinese corporations.

2015-07

 
The US Federal Reserve had a mild tone in June, announced to remain the current interest rate unchanged. As a result, both the USD exchange rate and US bond yield declined to certain extend. Euro zone was worried that Greek debt problem may get worse and Greek may even exit the Euro zone, leading to more market fluctuations. The Greek government failed to meet EUR 1.6 billion debt payments to IMF by 30 June; Greece announced capital control and closed banks in order to prevent collapse of banking system. Prior to that, European Central Bank decided not to provide additional emergency aid to Greece.
Depreciation in USD recently has been supporting RMB exchange rate to remain stable. RMBUSD exchange rate has been fluctuating within a narrow band.
We have seen quite a few offshore RMB bond issuances this month; one of the issuances was from a domestic housing enterprise (Financial Street Holdings), which the market has not seen for a long time.
Credit incidents affecting bond market recently include Kaisa event and Shanshui Cement dispute. Although certain onshore enterprises have seen credit risks, the rebound of offshore RMB bond market continued with most offshore RMB bond yield continued to decline. Supported by stable RMB FX rate and increasing investor demand for RMB bonds, high grade bond yield has decreased, especially those with international ratings. 
 

2015-05

US treasury yield fluctuated in April and went up by the end of the month. The Fund continued to sell high rating USD bonds, while keeping some high yield USD credit bonds not sensitive to interest rate.
PBOC cut required reserve ratio (RRR) again in April after the interest rate cut in March, causing a big drop in onshore RMB short end interest rate. We believe there’s still room for lower interest rate in onshore market, and this round of interest rate cut, RRR cut and open market operation will restart the downward channel for interest rate.
Offshore RMB bond market stabilized in line with CNH, with swap went downward and bond yield stable with a slight decline.
 

2015-04

US economic data continues to improve with employment index driven the US treasury yield breakthrough year-to-date high of 2.20% early this month. However, interest rate is expected to decrease further given implementation of quantitative easing by European Central Bank. Investors generally expect US to raise interest rate in Q3 of this year and interest rate risk will gradually increase afterwards. The Fund has lowered USD investment grade positions while continued to hold some high yield credit bonds which are not sensitive to interest rate.
PBOC had a rate cut in early March, leading to a volatile increase in offshore CNH exchange rate. Short-term interest rate stayed high given IPOs and local bond issuances onshore and RMB forward premium offshore. The situation for FX and interest rate did not turn better until the second half of the month, and has resulted in a slowdown of offshore RMB bond issuances.
Kaisa event has drawn attention again in March as most creditors were unsatisfied with its foreign debt restructuring plan and refused to accept the restructuring agreement; offshore real estate high yield bond price was affected.  With the rate cut and further relaxation of purchase restrictions in real estate, the overall credit situation for Chinese issuers, especially those high yield bond issuers, have seen an improving trend.  Furthermore, high grade and high yield bond prices were volatile in general because many companies published annual reports this month.
 

2014-10

In October, the 10-year US Treasury Bond (UST) yield continued the downward trend beginning from later September. Concerns over a weak European economic outlook, continuously dropping oil prices and sluggish stock market performances have all led to prolonged rate decline of in the first half of October. 10-year UST yields collapsed to below 2% on Oct 15, lowest in the year. Luckily the market sentiments recovered with yield climbed back to 2.3. The US economic data were mixed -consumption remained weak, such as lower than expected car sales and falling retail sales, while employment data were still strong. The Fed terminated the quantitative easing as expected but mentioned that future rates hike will depend on overall economic performance. Benchmark Fed fund rates remained at low levels seen this year and the next 6-9 months will warm up to prepare for rate increase. The speed of rate hike may accelerate if there is significant improvement in global economy.
 
Back to onshore China, September Manufacturing PMI remained unchanged from August’s 51.1, and HSBC PMI fell 0.5 points to 52.3. Industrial output recovered to 8% from August’s 6.9%, while CPI came below expectation at 1.6%. The market continues to enjoy the easing monetary policy. PBOC lowered the repo rate by 10bps to 3.4%, for the third time this year, followed by market news that PBOC may inject liquidity to stock-holding banks. The domestic bond market correspondently continued to perform well with average yield decline of 30-40bps.
 
For the offshore credit market, property names were hit hard by the negative impact from the Agile corruption scandal. Also, resources and energy names were also affected by earnings downgrades due to the decline of oil prices. On the other hand, investment grade bonds and CNH bonds have performed better thanks to the low US rates and the continuing RMB appreciation. 
 
In the short term, we maintain optimistic on dim sum bonds and investment-grade US dollar bonds, and predict that room for further CNH appreciation may be limited.
 

2014-09

In September, the US 10-year Treasury Bond Yield first went up then declined and market’s attention is on Fed’s decision on interest rate. Given favorable economic data, investors were concerned about whether the meeting minutes will continue to phrase it as remain current interest rate in a “considerable time” and the employment market still experience “underutilization of labor resources” because the interest rate has increased from2.35% to 2.65% during the first half of the month. However, the interest rate decreased to 2.50% level as it turned out the abovementioned phrases were still being used, along with some technical factors such as extended duration at month-end/quarter end and portfolio adjustments. From economic data point of view, August ISM Manufacturing reached 9-year record high of 59 while non-agriculture employment didn’t cause significant impact though fell to 142 thousand surprisingly. Besides, Retail data increased 0.6% MoM in line with expectation while CPI increased1.7% YoY, which is lower than the expected number of 1.9%;durable goods orders excluding transportation increased 0.7%which is also better than expected. Overall, US economic data was quite strong showing all economic activities are in stable recovery. China onshore PMI reported 51.1 which is 0.1 lower than expected, while Industrial manufacturing increased by 6.9% which is also lower than expected. Given weak data, the market continues to expect easing environment from policy perspective .In the second half of the month, market rumors PBOC provided an aggregate of RMB 500 billion liquidity to the big five banks as three-month refinancing; in addition, PBOC brought down repo rate by 20 bps. These two measures has lowered secondary bond market yield down by 5-10 bps from the beginning of the month. Offshore RMB exchange rate fluctuated to as low as close to half year low of 6.13 in the beginning of the month and back to as high as 6.18 towards the end of the month given long holidays and political issues in Hong Kong. The fund’s USD class decreased 1.22% and RMB class decreased0.77% on monthly basis. HSBC Offshore RMB High Yield Index and Non-rated Bond Index (denominated in RMB) decreased by 0.09%.The fund underperformed index because of a bond called VNET17s, which had a discount of 6% because its US listed stocks had been short sold. Plus, RMB exchange rate fluctuation also caused negative effect on the fund. However, the position which we invest into onshore bond market through RQFII has gained 0.67%positive return, benefiting from the decrease in China mainland bond market yield. The fund will continue to invest into offshore RMB and USD denominated bonds and holds an optimistic view on Dim sum bonds and CNH appreciation.

2014-07

U.S. 10-year Treasury Bond continued drifting lower in July, especially when money flowed in for risk aversion purpose due to the tension in Ukraine and Israel during second half of July. Additionally, Federal Reserve Chairman Yellen declared at the congressional hearing that economic and employment recovery takes long, and inflation is still lower than long-term target. GDP released at month end showed a 4% increase in the second quarter, while it decreased by 2.1% after modification in the first quarter; Core PCE increased by 2% in the second quarter as well, and positive economic data stimulated yields to jump at the end of this month.
In mainland China, HSBC Purchasing Manager Index (“PMI”) reported 52.4 and continued to recover, indicating a positive trend of economic growth. The “micro-stimulus” measures promoted by the government and PBOC kept taking effect in the market; market was optimistic towards overall monetary and policy environment. M2 released by PBOC has increased by 14.7% annually, showing a persistent monetary expansion.  Offshore RMB exchange rate exceeded 6.20 in the second half of the month and kept modest appreciation. Among offshore RMB bonds, real estate sector has seen continuous rebound.
On monthly basis, the fund’s USD class increased by 1.08%; HSBC Offshore RMB High-Yield Index (denominated in RMB) increased by 0.38%; High-Yield and non-rated bond index (denominated in RMB) increased by 0.59%. The fund kept holdings of mainland real estate bonds at 25%, while sold some newly-issued bonds for profit.
The fund will continue to reduce USD positions and increase CNH holdings. We are optimistic about the appreciation of Dim Sum Bond and Onshore RMB bond in the short-term.
 

2014-05

•10 year US treasury yield repeatedly declined in May, from the peak of 2.70% due to ideal non-agricultural employment data released earlier in May to the bottom level of 2.40%. Although the overall economic data was decent and the stock market performed well for this month, neither could reverse the declining trend of treasury yield. Q1 GDP was downgraded to -1.0%, largely affected by the inventory and weather factors; while the outlook for Q2 GDP is better off.
•In mainland China, the HSBC Purchase Management Index (“PMI”) reported 49.4 while Manufacturing PMI indexed at 50.8; both of which were higher than months ago, indicating signals of stabilization and recovery of the economy. Whereas this year Consumer Price Index has been consistently low due to slowing down economic growth and decline in fund-raising; thus general market expectation is that monetary policy will tend to ease and the government had mentioned several times to implement differentiated RRR on some financial institutions; mainland China bond market yield has dropped sharply.
•CNH exchange rate was fluctuating narrowly around 6.25, which is very close to CNY; we expect that exchange rate to stabilize around 6.25, yet there was still room for appreciation with economic recovery in 2014H2. Offshore dim sum bond market is very active recently, where there are many enterprise financing issuances; among which investment grade bonds are particularly popular, while high-yield bonds were still dragged down by real estate sectors.
•The fund’s RMB class increased by 0.42% and USD class increased by 0.61% in May, while HSBC Offshore RMB High-Yield Index increased by 0.37% in terms of RMB and 0.74% in terms of USD. Since May, the fund has been actively reducing the proportion of the bonds issued mainland real estate enterprises to avoid industries with high risks, in order to maintain at a relatively balanced risk return interval. Meanwhile, the fund diversifies sector risks by moderately participating in the subscription of new issuances.  The fund’s overall duration is at a relatively low level of 1.9 to cope with the relatively low interest rate level and wait to increase duration later until rates rises. 

2014-04

  • April started off on positive note with the announcement of the mini stimulus by China. 
    • Tax cut for SME
    • Financing plans for social housing and urban infrastructure
  • Railway financing reform
  • These measures show that Premier Li’s government aims to stabilize short-term growth with policies. We don’t expect Beijing to initiate another 2009-styled stimulus, but some measures to fill the slack generated by demand shocks are necessary for financial, economic and social stability. It is obvious that the government is getting concerned with the Chinese economic growth and is doing something about it.
  • China also announced a cut to reserve requirement ratio for rural banks. This move seems to be focused on supporting job creation at the grass root level rather than supporting overall asset prices. Job creation is of paramount importance to the current senior leadership. This is consistent with cutting the red tape of government's business approvals since 3Q13, and the recent extension of tax breaks for micro businesses.  The change is miniscule in terms of credit flow to the economy, and this should be seen as a rural policy not a monetary policy. 
  • We are constructive on Shanghai/ Hong Kong Thru-Train that was announced by China's CSRC and HK's SFC. The initial market reaction has been A/H price arbitrage which we think is a low quality trade given fungibility is not allowed. We view the real opportunity is on the unique HK listed stocks that are well recognized by mainland consumers/ investors (HKEX, Tencent, Macau gaming, Lifestyle). Hedged by shorting H-shares Chinese cyclical stocks that are trading at premium to A that are squeezed recently (Anhui Conch, Angang Steel, Shenhua, Weichai Power).

2014-03

•HSBC China PMI closed at 48 (48.1 last month), RMB continued its slide, reached 1.56% this month, totally 2.95% from mid-February; this is the most decline since 2012Q2. In addition, China has annual National People Congress and Political Consultative Conference this month, after the meetings, the minutes revealed the emphasis continues to expansion of currency exchange trading bands, progressing on RMB capital account liberalization and expectation on economic growth to roughly 7.5% and etc. Furthermore, the first onshore exchange traded corporate bond announced its incapability of interest payment, officially deemed as default in March. Market risk-off tone prevailed.
•10 year US treasury yield rose 7 bps to 2.72% in March.  This is a relatively volatile month; in the beginning of the month, due to the strong employment data, treasury fell; however, followed by the tension in Ukraine, investors retraced back to safe asset and treasury rose; but at the end of the month, after Yellen, the chairwoman in FOMC, spoke about the possibility of closing QE by the end of fall and expecting to raise rates after 6 months of QE departure, market quickly reacted on the news and pushing treasury down. In Asia, HSBC Asia High-Yield USD Bond Index rose 0.73% and HSBC Offshore RMB High Yield and Non-rated Index slid 0.18% in RMB term and 1.70% in USD term. CNH continuously depreciated 1.56% against USD in March. The fund returned -2.00% in USD, -0.44% in RMB and -2.04% in EUR.    
•Market focused on the directions of RMB this month heavily, and by the month end, RMB once again broke the ceiling to the level of 2013 spring. Therefore, the depreciation of RMB pressed hard on the price of RMB asset. After Political and Congress conferences in China this month, the mumbles about the stability of economic growth and risk control in China are getting more attention, signaling the negative sentiment; the primary market of bond issuance came to a complete stop. Despite that, the unrestricting of preferred shares in discussion soon relieved the fear of solvency in certain corporations by investors; then currency and asset price stabilized. It is estimated this wave of price correction and flagging sentiment will come to an end. We will continuously seek opportunities in the manor of prudently assessing risk and cautiously analyzing trends to gain stable growth return for investors.

2014-02

•HSBC China PMI closed at 49.5 (50.5 last month) as Chinese New Year is in Jan this year. In the US, Fed continued QE tapering of 10 bn to 65 bn as expected though stock market declines and economic data stays flat. Massive media reports of potential CCT default has hit the bond market, dragging price down; but price recovered and market restored rational by the end of Jan as trust investors received payments.
•10 year treasury yield dropped 38 bps to 2.64% in Jan.  The demand for hedging in treasuries was resulted from the combination of slowing-down of recovery momentum, stock market slid, and outflow fund from Emerging market. In Asia, HSBC Asia High-Yield USD Bond Index slid 0.09% and HSBC Offshore RMB High Yield and Non-rated Index gained 0.4% in RMB term and 0.78% in USD term. CNH appreciated 0.33% against USD in Jan. The fund returned 0.23% in USD, -0.13% in RMB and 1.83% in EUR.
•Under the expectation of the starting cycle of reduction in quantitative easing, issuers rushed in tapping the capital market, hoping to retrieve funding before rates rising. Initially, market highly accommodated the supply from high yield, however, followed by the rampant news about the possible first case of default in a trust fund in China, investing in coal mining equity right. Market quickly turned conservative along with the depreciation of emerging market currency, driving down asset price. Finally the trust fund investors retrieved the entire principal and partial interest. The so-called first case of default didn’t happen but the risk appetite was already smashed, seeing only small rebound. Investors now are sitting on the sideline.  US treasury was fiercely volatile in the beginning of the year. We observed the low confidence level among investors thus the temporary connection is undergoing in the market, pertaining to the reaction of loose monetary policy. This is easily led to over-reaction in the market and we will seek opportunities in the manor of prudently assessing risk and cautiously analyzing trends to gain stable growth return in long run.
 

2013-12

HSBC China PMI closed at 50.5 in Dec ( 50.8 last month), Fed initiated the tapering in the back of steady economy recovery; starting from January 2014, the purchase amount is reduced to 75 billion from 85 billion. After the announcement was released, 10 year treasury yield swiftly was pushed to the 2 year high. However, Asia bond market was not that vulnerable, the performance slightly slid in Dec.

10 year treasury yield rose 28 basis points to 3.02% in Dec. This is the peak since 2011; given some time in Sep, the yield was almost hit at 3%, finally rolled down to 2.5% by dovish talks from Fed and instable recovery in economy at the time. In Asia market, HSBC Asia High-Yield USD Bond Index slid 0.13% , and HSBC Offshore RMB High yield and non-rated index gained 0.53% in RMB term, 0.99% in USD term. CNH appreciated 0.46% against USD in Dec, totally 2.69% in the year of 2013. In Dec the fund returned 1.08% in USD, 1.07% in RMB, and -0.07% in EUR.

Just prior to the holiday season, Fed decided to take action by reducing the purchase of 10 billion starting in January 2014, although it is a delayed decision by market conception (Market expected to see tapering in Sep 2013; Fed surprisingly took no action at the time). Along with the multiple data shown well-established recovery and the historical high in S&P500 index, the treasury yield started its upward trend early this year. Even though, the increase of 140 basis points at most for 10 year treasury yield in 2013 is not that memorable comparing to those in previous years.  In the view of Asia bond market, the yield ramped up to 3 year average with the increasing yield of treasury, which formed a constructive cycle in this market. Facing the challenge from the turnaround in US economy, the upward trend in rates, Asia high yield bond market will attract more diversified issuers, increase the variety, the scale and activity as China is undergoing structure adjustment and economically reformative growth. In 2014, we will take flexible risk asset allocation strategy; obtaining good quality asset in times of interest volatility and maintaining relative low duration, and the most importantly, implementing the high coupon strategy in the long run.

2013-11

•       November HSBC China PMI 50.8 (50.9 last month) / Market was optimistic after the Third Plenum announcement / Asia primary market kept up the momentum since October, raising US$5bn and RMB 28.7bn respectively

•       10 year US treasury yield ends at 2.74% (+19bps) / HSBC Asian High-Yield USD Bond Index -1.30% / HSBC Offshore RMB High Yield and Non-rated Bond Index +0.63% in RMB term and +0.73% in USD term/ CNHUSD + 0.11% in Nov and 2.24% YTD

•       Market is worried that Fed may reduce debt purchase, pushing up volatility of government bond yields as some Fed members’ concerns with the current bond purchase program, and gradually improving economic data along with the peak of S&P 500 Index in history. The outcomes of Third Plenum Meeting are regarded as beneficial to the stable growth of Chinese economy, leading to a steady increase of bond prices. In the past two months, we have seen the advancement in both primary and secondary markets

•       -The fund added allocation to risky asset slightly and kept a relatively low short duration. We have gained quality balance between yield and risk. We implement high coupon allocation as our main strategy

2013-10

HSBC China PMI 50.9/ SHIBOR rose rapidly in late October/market focus now on new policies to be announced in the Third Plenary Session of the 18th Central Committee of the Communist Party/US government delayed debt dispute to next year

Fed’s decision to stick to the 0.25% base rate and current bond purchase plan boosted market appetite for risky assets. Asia new debt issuances boomed in late October

10Y T yield ends Oct at 2.55% (-6bps)/HSBC Asian High-Yield USD Bond Index +3.21%/HSBC Offshore RMB High Yield and Non-rated Bond Index +1.15% in RMB term +1.59% in USD term/CNHUSD +0.42% in Oct and 2.1% YTD/ EURUSD +0.42%

The last two months are expected to be relatively stable as major policy risks are mitigated

2013-09

HSBC China PMI 50.2 (vs. 50.1 in Aug)/US economic indicators improved/Syria tension eased/Fed refraining from reducing bond buying restored market confidence

10Y T yield ends Sep at 2.61% (-18bps)/ HSBC Asian High-Yield USD Bond Index +3.66% in Sep, +0.99% in 3Q/HSBC Offshore RMB High Yield and Non-rated Bond Index +1.43% in RMB term +1.43% in USD term/CNHUSD flat,  EURUSD +2.31%

As long political deadlock between the two parties would definitely bring irreversible destructions to the economy, US government shutdown would not last long. Treasury yield maintained at a recent low level, such environment has attracted many enterprises back to the market for financing, and the action was generally supported by investors.

With the increase in bonds’ supply, as high yield bonds are expected to maintain at their current asset price, we believe that using bond income and low duration as the primary strategy will achieve a good performance in Q4.

2013-08

 After the panic bond market correction in June, Chairman of US Federal Reserve, Bernanke, made a speech in the semi-annual Monetary Policy Report to the Congress. In contrast to his remarks after the June FOMC Meeting, he emphasized that although employment and inflation data are important indicators of economic recovery, they do not necessarily lead to immediate reduction in debt purchases; besides, there is still possibility to increase purchase if economic recovery remains weak. This comment has eased market concerns on rising long-term bond yield. What’s more, a number of economic data illustrated that apart from the housing market, economic recovery in the U.S. is still weak. As for Asia, China's 2013Q2 GDP growth was 7.5% and PMI was around 50, raising investors’ concern on China’s ability to achieve 7.5% annual GDP growth. In addition, the government has put forward a number of reform plans in the beginning of the year, which will limit the financing channels for industries with excessive capacity. However, President Xi has mentioned several times in July that the goal of economic policy is to achieve stable growth, secure employment opportunities and continue on economic restructuring, which brought rationality back to market.

U.S. 10-year treasury yield rose by 9 bps this month. As for Asia market, HSBC Asian High-Yield USD Bond Index returned 1.19% in July, while HSBC Offshore RMB High Yield and Non-rated Bond Index returned 0.99% in RMB term and 1.07% in USD term. In addition, CNH appreciated 0.08% against USD this month.

Over the past two months, market speculated that China and U.S. would have policy changes, which would cause an increase in risks. Such speculation has increased market volatility, which should fall back in the coming future. We believe that the market has completed the price correction process and will gradually come back to stability given investors would treat possible liquidity and industrial restructuring changes with more rationale. It is expected that the market will remain stable in the second half of the year.

2013-07

After the panic bond market correction in June, Chairman of US Federal Reserve, Bernanke, made a speech in the semi-annual Monetary Policy Report to the Congress. In contrast to his remarks after the June FOMC Meeting, he emphasized that although employment and inflation data are important indicators of economic recovery, they do not necessarily lead to immediate reduction in debt purchases; besides, there is still possibility to increase purchase if economic recovery remains weak. This comment has eased market concerns on rising long-term bond yield. What’s more, a number of economic data illustrated that apart from the housing market, economic recovery in the U.S. is still weak. As for Asia, China's 2013Q2 GDP growth was 7.5% and PMI was around 50, raising investors’ concern on China’s ability to achieve 7.5% annual GDP growth. In addition, the government has put forward a number of reform plans in the beginning of the year, which will limit the financing channels for industries with excessive capacity. However, President Xi has mentioned several times in July that the goal of economic policy is to achieve stable growth, secure employment opportunities and continue on economic restructuring, which brought rationality back to market.
U.S. 10-year treasury yield rose by 9 bps this month. As for Asia market, HSBC Asian High-Yield USD Bond Index returned 1.19% in July, while HSBC Offshore RMB High Yield and Non-rated Bond Index returned 0.99% in RMB term and 1.07% in USD term. In addition, CNH appreciated 0.08% against USD this month. The market continued to see capital outflows in the first half of July, and the Fund slightly underperformed the index as a result. The Fund maintained appropriate liquidity in July and returned 0.43% in USD term, 0.40% in RMB term and -0.99% in Euro term, respectively.
Over the past two months, market speculated that China and U.S. would have policy changes, which would cause an increase in risks. Such speculation has increased market volatility, which should fall back in the coming future. We believe that the market has completed the price correction process and will gradually come back to stability given investors would treat possible liquidity and industrial restructuring changes with more rationale. It is expected that the market will remain stable in the second half of the year.

2013-06

Offshore RMB bond issuances have reached 75.7 billion RMB (about 12.3 billion USD) in the first half of 2013, among which financials comprise 37%, real estate 24%, sovereign 17% and industrials 15%. The majority were issued by issuers from Greater China Region, accounting for 76% of total. In June, the Chairman of US Federal Reserve, Bernanke, stated that they would consider reducing the purchase of Treasury bonds and Mortgage-backed securities this year if the stable recovery of economy persists. This statement triggered the fear of rise in long-term yields, causing a 36bp jump in 10-year treasury yield. As for Asian bond market, given macro-economic factors including surge in overnight repo rate due to tight liquidity in China’s onshore interbank market and market’s expectations for the rise of medium-to-long-term interest rates in U.S., investors tended to shed away from risky assets and cash in, pushing down the prices of Dollar and Dim Sum bonds. HSBC Asian High-Yield USD Bond Index returned -5.21% in June, while HSBC Offshore RMB High Yield and Non-rated Bond Index returned -2.62% in RMB term and -2.44% in USD term. In addition, CNH appreciated 0.22% against USD this month.
The market has seen capital outflows this month due to increasing uncertainty of the debt market and rising fear of a sharp increase in bond yield. It is our view that after the digestion of selling pressure, market will become rational again, and long-term investment opportunities will resurge. The Fund will prudently evaluate risk and adjust portfolio allocations on the premise of ensuring adequate liquidity.

2013-05

By the end of May, China real estate developers have issued about 10 billion USD denominated bonds and 14 billion dim sum bonds, accounted for 40% of high yield bonds issuance this year. In May, 10-year US government bond yield rose by 45 bps, given the US Federal Reserve considering reducing monthly bond purchase and good performance from several market indices. HSBC Asian High-Yield USD Bond Index returned -2.51% in May, while HSBC Offshore RMB High Yield and Non-rated Bond Index returned 0.43% in RMB term and 0.66% in USD term. CNH appreciated 0.20% against USD this month.
Due to the slowdown of China’s economic growth data, together with the announcement of potential QE tapering in US and rising stock market, some investors concerned that the bull market for bonds will end soon, causing bond prices to fall. However, we believe that bond prices will gradually revert to reasonable level when the actual economic performance cannot meet what’s implied by the current overreacted prices. We are aware that the financial market is experiencing great fluctuation, and will cautiously monitor market dynamics and assess risk preferences, in order to make appropriate adjustment and allocation to the portfolio.

2013-04

Asia bond market set a new record again in April, raising a total of USD 20 billion equivalently in USD and CNH bonds. Chinese corporate bonds continued to dominate the space, accounting for two-thirds of the new issuance, with noticeable investment grade issuers.  Asia bond market has printed nearly USD 60 billion so far this year. In terms of performance, with the contraction of 9 to 18 basis points in the yield of US government bonds, HSBC Asian High-Yield USD Bond Index returned 2.18% in April, while HSBC Offshore RMB High Yield and Non-rated Bond Index returned 0.51% in RMB term and 1.24% in USD term. CNH appreciated 0.67% against USD in the same month.
We have noticed that quality companies have increased their leverage this year. As their revenues and profits are both better than those of last year, the higher leverage caused no negative effect on their credit ratings. To the contrary, new debt issuance helped to extend the companies’ near term repayment timeline and reduced their cost of financing, which benefits bond valuation. Entering the middle of the second quarter, we will pay close attention to the upcoming global macro events and moderately adjust our risk positions in the current low-yield environment.

2013-03

We finished the first quarter of 2013 in a constructive start. HSBC Asian High-Yield USD Bond Index returned 0.21% in March. Its quarterly return was still recovering from the January correction, with a total return of negative 0.46 %. However, in CNH market, HSBC Offshore RMB High Yield and Non-Rated Bond Index had another good month, up 0.47% in March and 2.62% quarterly in RMB term; 0.69% in March and 2.85% quarterly in USD term. Total quarterly issuance summed up to 40 billion USD, a new record for Asia credit market.   

The active primary market is well supported by affluent fund inflow in Asia credit so far this year. We have seen many deals oversubscribed by multiple times of its issuance size, pushing the yield to low levels. In the meantime, it also helps to support the price in secondary market.

Most Asian corporates released the strengthened 2012 financials in March, and improving the debt profile by extending their short-term obligations. We regard these fundamental changes along with the easing monetary policies to continue to benefit Asia credit. Even so, we will diligently search for quality credit with prudent risk control on hand.

2013-02

In February, due to Chinese New Year effect, HSBC Asian High-Yield USD Bond Index slid 0.14%, while its China Index went up by 1.13%. In the new issuance space, only 1.25 billion USD bonds were printed in February, comparing to a very small amount in CNH. In the environment of short supply but ample demand, the market was in a slightly upward movement. HSBC Offshore RMB High Yield and Non-Rated Bond Index returned 0.87% in RMB term and 0.78% in USD term. RMB this month depreciated 0.14% against USD.

Given the high volume of new issuances so far this year, the market, in general, performed well with the support of abundant inflow. It is estimated that the gross issuance amount this year could slightly outnumber that of last year. However, during the first half of 2013, we are facing the challenges of adjustment in global quantitative easing, the possibility of the rise in base rate and etc.

2013-01

After reaching a historical high in early January 2013, Asian credit market, especially the USD Chinese corporate bonds, finally had some minor correction under the pressure of huge new issuance. The CNH market on the other hand, continued its rally with limited supply and huge demand. HSBC Offshore Renminbi High Yield & Non-Rated Bond Index returned 1.26% in RMB terms and 1.34% in USD terms. RMB appreciated 0.19% vs. USD over the month.

However, under the current environment of ample liquidity, we don’t see big market correction risk pressured by new issuance. Therefore in the near future, we will still maintain a relatively high carry portfolio as the main source of return, while seeking alpha through careful credit selection.

2012-12

With ample liquidity, less supply and more demand for risk, Asia credit market continued its rally into 2012 year end, despite concerns over US fiscal cliff. HSBC Offshore Renminbi High Yield & Non-Rated Bond Index returned 0.71% in RMB terms and 0.61% in USD terms. RMB depreciated 0.12% vs USD over the month.

Credit spreads are at historical lows now, with limited room for further contraction in the future. Looking forward into 2013, we see a stably performing credit market with tail risks largely reduced, in which carry will be the main source of return and high yield credit will outperform investment grade credit. But we see chances of market volatility caused by macro noises and that will be opportunity to add risk. In addition to the carry play, we think there will be more credit differentiation in the market, therefore credit selection will be another important source for alpha.

2012-11

Asia credit market saw some correction after US presidential election on concerns about fiscal cliff, before bouncing back strongly towards the end of the month on aggressive demand and dealers’ low inventory. More issuers came to the market, taking advantage of the last time window of this year. However new supply was easily absorbed by the market. HSBC Offshore Renminbi High Yield & Non-Rated Bond Index returned 0.82% in RMB terms and 1.29% in USD terms. RMB appreciated 0.47% vs USD over the month.

Looking forward into 2013, we see a stably performing credit market with tail risks largely reduced, in which carry will be the main source of return and high yield credit will outperform investment grade credit. But we see chances of market volatility caused by macro noises and that will be opportunity to add risk. In addition to the carry play, we think there will be more credit differentiation in the market, therefore credit selection will be another important source for alpha.

2012-10

Asian credit market continued its strong performance in October, on improved economic fundamentals in both US and China. Chinese economy was seen to have probably bottomed out in Q3, especially infrastructure and real estate investments showed good signs of recovery. Issuers took advantage of the benign market environment to raise debt capital, balancing the strong inflows into Asia credit market. However not all new issuances performed well, credit selection became the key to generate excess return. HSBC Offshore Renminbi High Yield & Non-Rated Bond Index returned 0.82% in RMB terms and 1.79% in USD terms. RMB appreciated 0.97% vs USD over the month.

2012-09

Asian credit markets witnessed another month of positive returns as a result of fulfilled promises from and expectations on the world’s two most important central banks: ECB announced its Outright Monetary Transactions while Fed launched QE3. Despite the fact that these actions were much anticipated previously, market still rallied on largely reduced tail risk and the need to put cash to work. HSBC Offshore Renminbi High Yield & Non-Rated Bond Index returned 0.45% in RMB terms and 1.26% in USD terms. RMB appreciated 0.81% vs USD over the month.

Looking forward, capital gain potential is much more limited due to stretched valuation, but technical support from both fund inflows and policy backdrop will continue to play an important role. Carry will be the major source of return, therefore our strategy will remain focusing on carry with a short duration bias, while at the same time we try to add value through some trading opportunities.