Asian Fixed Income Outlook Q2 2021
1Q21 market review
The volatility in U.S. rates, buoyed by the USD1.9tn fiscal stimulus and inflation fears picked up materially in 1Q21. The sharp move of 80bps in 10-year U.S. Treasury yield (Fig. 1) during this period caught the market off-guard as it resembled the sell-off in the 2013 taper tantrum. Higher vaccine rates, better PMI and job data in the U.S. all signal a fast momentum of economic recovery. To further stimulate growth, the U.S. administration has proposed a new fiscal package (infrastructure, health care) to be approved later this year. Given this plan is multi- year, the immediate fiscal impact could be less relative to the extraordinarily large amount in 2020-21.
China’s economic activities rebounded strongly in Jan-Feb’21 from a low base, led by exports, property investment and industrial production. The NPC set GDP growth target at “above 6%” for 2021, but there is upside bias on this guidance (markets expect c8.5-9%). It emphasized supportive macro policies to the economy and not to turn sharply. The balancing need for growth recovery and risk control should see credit slowdown persisting. This implies tighter liquidity and regulatory measures, e.g. control of shadow credit, more stringent supervision of financial holding companies and Fintech.
Robust demand from China, supply disruptions and “reflation trade” inflows have supported commodity prices in 1Q21. Copper and aluminum outperformed while gold lagged. Oil prices also witnessed a strong rebound (+23% YTD) on a collaborative OPEC cut and pick-up in demand. A widely expected trend will be sharp accelerations in inflation in the coming months globally and in Asia. But with inflation in Asia unlikely to move sharply, central banks’ policies should remain loosened except China.
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