Brace the Volatility in 1H17

13 January 2017

Credit Markets Monthly Review

December 2016

Brace the Volatility in 1H17   

Market Review

¨   USD: US Treasuries bear flattened; IG credits were broadly unchanged during the festive period.

¨   SGD: Expected rise in SOR rates in 2017. SG banks standalone credit strength downgraded.

¨   MYR: Weaker MYR, lower bond returns in 2016. Higher returns for quasi-government and corporate bonds in 2016.

Demand and Supply Trends

¨   USD: Primary market lull; new supply in December amounted to USD8.3bn; YTD issuances reached USD238.6bn.

¨   SGD: 2016 net issuances significantly lower, predominantly high grade and longer-tenured.

¨   MYR: Government-guaranteed (GG) bonds led primary market in 2016.

Rating Trends

¨   HY credits led downgrades; SG banks standalone credit strength downgraded; average upgrade/downgrade ratio of 0.31x against November’s 0.35x and YTD’s 0.34x.

¨   Al-Bayan defaults, 9 downgrades and 2 upgrades in 2016.

Outlook

¨   Political risks in 1H17. We see increased risks of volatility over the next half year, especially in the Emerging Markets (EM), in light of several key political and election events in the 1H17 – 1) Trump will be inaugurated as the President of US on the 20-Jan and the policies which may occur with the new political regime thereafter; 2) UK negotiations with EU on Brexit; 3) Elections in Italy, the Netherlands, France, UK and Germany raising risks of further separation of the EU region. We believe sentiment will improve going into 2H17 as we expect Trump will adopts a more moderate policy while softer-than-expected economic growth likely to keep US tightening path on a more gradual timeline (from the current 3 rate hikes expectation).