ASIAN MORNING BUZZ: Heightened volatility to weigh on USD supply?

Headlines

** Hot economic data dampens US rate cut hopes further

** US Treasury bonds and stocks take a subsequent beating

** Focus back to inflation data

** Volatile backdrop could take the wind out of primary market's sails this week?

** After APAC issuers generally secured attractive funding in massive supply week

** Asian USD Investment Grade spreads close out week at tightest levels since November

US Treasury yields advanced to fresh highs on Friday after a hot jobs report and resurgent inflation expectations in the University of Michigan sentiment survey cemented expectations that the Fed is unlikely to cut interest rates again for the foreseeable future.

That after bearish seeds had already been sown in Asia on Friday after a report claimed that the BoJ is considering raising its inflation outlook later this month, which propelled the benchmark 10-year JGB yield to a 14-year high at 1.20%.

Meanwhile, headline US non-farm payrolls grew by 256k in December which smashed expectations at 165k and a revised +212k previously. The Unemployment rate edged down to 4.10% from 4.20% prior and the same expected.

Aside, 1-year inflation expectations in the University of Michigan sentiment survey came in at 3.30% versus 2.80% previously and the same expected, while long term expectations (5-10 year) also came in at 3.30%, the highest since 2008, from 3.0% prior and forecasts for more of the same. And the headline U of Mich number was 73.2 from 74 prior and forecasts for a repeat of that number.

The US Treasury curve bear flattened sharply post data with moves most dramatic in the more rate sensitive short-end and belly of the curve. The 2- and 5-year yields jumped by 11.52bp and 11.76bp to 4.379% and 4.574%, while the 10-year closed out 6.99bp higher at 4.759%.

The rate market is now discounting just 32bp of easing in 2025, down from 43bp on Thursday as investors adjust to potentially tighter Fed policy.

And as underlying bonds yields spiked sharply so US stocks took a pounding on Friday, where big tech led valuations lower ahead of the start of the Q4 earnings season that kicks-off in earnest next week, where the usual financial big hitters will be on the menu.

In the interim, the Nasdaq and Dow Jones both slumped by 1.63% on Friday which took weekly losses for the two bellwethers to 2.34% and 1.86% respectively. Meanwhile, a 1.54% decline of the S&P500 on Friday saw the index close out the week 1.94% lower than it started it.

In other markets, oil prices rallied to 3-month highs on Friday as traders positioned for the potential impact on supply from various sanctions imposed by the Biden administration on Russian oil and gas. Brent Crude gained 3.69% on Friday at US$79.76 a barrel with WTI close behind with a rise of 3.59% to US$76.57.

Looking ahead, the first full trading week of the year will be a busy one in terms of data and earnings. Inflation will be at the centre of attention, with the New York Fed's one-year inflation expectations due on Monday, PPI on Tuesday, CPI data on Wednesday followed by jobless claims on Thursday. The earnings season will be kick-started by major U.S. lenders including JPMorgan, Goldman Sachs, Citi and Wells Fargo on Wednesday.

Elsewhere in Asia, China's December trade data will be released on Monday, which should provide investors further insights on the challenges facing the world's second largest economy. China's stocks have been facing their worst start to a year since 2016 after falling more than 5% year to date, officially entering a bear market on Friday as investors brace for higher tariffs under Trump's administration.

For a more comprehensive look at Friday’s price action and a look ahead to Monday’s headline event risk for global markets, see IGM’s Asia Breakfast Briefing. And for a detailed look at what events markets across the globe will be keeping a close eye on throughout this week, see IGM’s The Week Ahead.

Volatile backdrop puts USD supply prospects in jeopardy after massive week in primary?

This negative tone in broader markets clearly does not bode well for near-term supply prospects in the APAC USD primary bond market this week.

The latest uptick in US Treasury yields in particular could derail some potential issuer’s funding plans, as costs rise and the greenback becomes a less viable funding option versus local currency and/or loan markets once again. Moreover, we could also see investors demand more eye-catching spread compensation to cushion execution risk against such a volatile broader market backdrop.

The confirmed pipeline of geographically diverse issuers is looking quite healthy as we start the new week however, thanks to the likes of Tata Capital and IIFL Finance Limited from India, Vinhomes JSC from Vietnam, Malaysian lender AmBank, Chinese state-owned energy company Shandong Energy Group Co., Ltd while representing South Korea we have Hyundai Capital Securities and Korea Housing Finance Corporation (KHFC).

It will be interesting to see how many of those successfully come to fruition this week assuming that the backdrop remains more challenging.

That said, the slew of regional issuers that raised a massive US$29.7bn of paper in the first full week of the year may be glad that they pulled the trigger when they did, having largely been embraced by investors by varying degrees.

The average cover ratio on last week’s investment grade (IG) deals totalling US$28.55bn (incl. Japan) came in at a healthy 3.36x. That allowed issuers to tighten the spread by 31bp on aggregate during execution, which in turn paved the way for them to lock-in some attractive funding costs at a modest average new issue concession (NIC) of around 2bp, IGM data shows.

And that NIC declined to 0bp (zero) on average when stripping out the US$8.75bn sold by Japanese issuers last week. For a more comprehensive look at last week’s issuance trends see the APAC CREDIT REVIEW.

Asian USD IG spreads close week at tightest levels since late November 2024

Finally, a quick look at the broader Asian USD cash credit market last week shows that investment grade and high yield spreads both tightened, with the former having enjoyed a particularly strong session on Friday, as highlighted by a pair of Bloomberg indices.

The Bloomberg Asia USD IG Bond Index Avg OAS (BAIGOAS) tightened by 2.74bp on Friday to 72.6bp which saw the IG index tighter by 3.62bp overall versus the previous week’s closing level (03-Jan-2024).

That marks the tightest closing level for the index since 22-Nov-2024 and is also 5.4bp tighter than its recent wide of 78bp where the index closed out 2024.

Its high yield counterpart - Bloomberg Asia USD HY Bond Index Avg OAS (BAHYOAS) – closed out last week at 400.9bp which was 8.99bp tighter than where it started the week thanks to a constructive session on Friday where the HY index tightened by 12.02bp.

Last Friday’s close marked the tightest level for the HY index since April 2018.

Snapshot of APAC USD, EUR, CNH, CNY, HKD, SGD, AUD & NZD issues priced on 10th Jan 2025. Click on the links for the most recent updates:

US Credit

High grade borrowers picked up where they left off last year, topping the weekly average estimate. While 39 ex-SSA borrowers raised US$62.7bln this week to top all weekly estimates including the highest one of US$60bln, SSA’s stole the show, turning in the second busiest overall (SSA-inclusive) week on record. Twenty SSA entities raised US$65.465bln, to bring the overall total for the week to US$128.165bln, blowing away the highest overall estimate of US$80bln, and topped only by the US$130.605bln that priced the week of March 30, 2020, at the onset of the pandemic.

While we’re not expecting a repeat of last week’s volume, issuers should still come out swinging this week, with a good possibility of appearance from one or more “big six” banks. While the group doesn’t start reporting until the middle of next week, they are famous for issuing bonds immediately after reporting quarterly results. Over the past seven years the “big six” have contributed, on average, US$20bln to January’s bottom line – last January, they combined to raise US$28.75bln. For a more comprehensive look at the blow out week in the USD primary bond market and a look ahead to this week’s expectations for supply, see the IG WEEKLY WRAP UP.

European Credit

The second busiest week ever for euro supply was not quite done yet with CAFFIL the latest to issue in the rejuvenated covered bond market Friday, whilst unrated Cibus Nordic Real Estate was also out with a sub-benchmark offering. Away from euros, Mercedes-Benz offered the first GBP corporate trade of 2025 and IFC followed up on a mandate the previous session with its own sterling transaction. The deals totalled EUR1.3bn and GBP1.05bn.

Meanwhile, Friday’s limited activity meant that the overall weekly single currency haul finished up at EUR101.7bn, the second largest ever, only beaten by the all-time high of EUR112.445bn recorded in the corresponding week last year. This week’s ex-HY total of EUR100.8bn was above the average supply estimate of EUR68.5bn put forward by participants in our issuance poll, but short of the highest combined forecast of EUR110bn. SSAs did the heaviest lifting this week with the sector accounting for EUR64.35bn of the overall total (including EM). For more colour on last week’s issuance trends in the European primary market, see the EUROPEAN DAILY CLOSE.

APAC USD/EUR Pipeline

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