Bond markets in Asia are more resilient now than in the past, according to TD Securities, with expectations for the containment of the Evergrande crisis and strong positioning in the face of upcoming Fed tightening.

Chief Emerging Markets Asia and Europe Strategist at TD Securities, Mitul Kotecha, gives his views on the risks and opportunities in Asian fixed income, in a discussion ahead of the Fixed Income Leaders Summit Asia 2021.

In light of ongoing concerns about Evergrande, what is your view on default risk? What about contagion risk?

China's authorities are unlikely to rush in to provide support unless there is a significant worsening in the situation and a broadening of the economic risks. Given China's authorities push for «common prosperity» and the «three red lines» approach to contain leverage, it is clear that policymakers do not want investment resources pushed into the property sector.

While there clearly are interlinkages between banks and developers, with credit spreads for other developers also widening, we think the situation will be contained, albeit with potentially more short-term pain.

How would a bailout impact China’s pursuit of market reforms?

If there was any bailout, it would seem to go against the trend of Chinese policies discouraging moral hazard.

China wants to show that its policies are having an impact without intervention and that they are letting markets work efficiently without creating cracks or systemic risks. It might be a different question in another sector but in the real estate sector, any significant bailout at this point would seem to go against the thrust of their regulatory policy.

What is your view on the longer-term outlook for yuan-denominated bonds in general? What about the outlook for the broader bond market in Asia?

Generally, we expect continued growth for yuan-denominated onshore and offshore bond markets. Although foreign flows into China's onshore bonds have slowed in recent months, they remain positive with continued growth drivers like index inclusion and improved channels into Chinese bonds. The offshore CNH market also continues to grow, especially through issuance in Hong Kong, with the new Southbound Bond Connect channel adding more impetus to the growth of this market. 

In the broader region, we’ve started to see a decent reversal of outflows back into some of the main bond markets in Asia. I think the outlook for the Asia bond market is going to continue to be positive, especially given low volatility in markets, currency stability, and some support from official buying. India, for example, could also benefit from potential future inclusion in bond indices.

What is the house view on monetary tightening at the Federal Reserve? How is this expected to impact bond markets in Asia?

We expect the $120 billion-per-month Fed QE program to be wound down at a $15 billion-per-month pace, over eight months, starting in November. After that, we don’t expect a quick rate hike. We are looking at December 2023 as the first Fed rate hike, which is more dovish than the market expectation of an earlier hike.  Given that we expect the Fed to be in no rush to hike rates even after tapering ends, we think this will bode well for Asian bond markets. 

Well-flagged Fed tapering is also unlikely to cause much consternation in Asian bonds. A lot of the Asian markets are much more resilient than they were previously to Fed tapering and higher U.S. rates. Many economies have strong external positions with less reliance on the dollar and less foreign influence within their markets. Those that are more exposed to foreign flows are potentially the ones that will be most impacted. One such example is Indonesia but even then, Bank Indonesia (BI) is supporting the market, making up for a greater portion of buying compared to foreign investors. Unless there is a dramatic move higher in U.S. yields, it would seem that we’re not going to see a large impact in Asia.

  • finews.asia is an official media partner of the Fixed Income Leaders Summit Asia, held on 29–30 September 2021, SGT. Register now to join Mitul Kotecha's session: «All-Star Panel: All-Star Panel: FX trading in volatile times – Opportunities & challenges»

Mitul Kotecha has over 25 years of experience as a strategist and economist in London, Hong Kong and Singapore. Prior to joining TD Securities, he was the head of FX and rates strategy for Asia-Pacific at Barclays. Previously, he was also the head of global FX strategy and head of Asia research at Credit Agricole CIB. Kotecha holds a masters of science degree in economics and finance from the University of Warwick and an honours degree in economics.