October 2022 Commentary
After a bruising September in stocks and bonds, the underlying narrative in the global markets remained largely unchanged. Elevated inflation, rising rates and recession fears were headwinds that continued to depress bond investor sentiment.
In October, inflation in Europe soared to a new record high at 10.7%, with higher food and energy prices as the main contributors. Meanwhile, Chinese cities doubled down on their zero COVID-19 policy with lockdowns, leading many to believe that supply shortages may persist.
In Australia, the central bank announced a smaller-than-expected rate hike, citing a deteriorating outlook for the global economy. Similarly, the Bank of Canada slowed its pace of rate hikes, forecasting its economy would stall over the next few quarters.
In the U.S., while the CPI inflation remained strong, consumer data and earnings reports from big tech companies revealed signs that inflation dynamics in the country may be slowing down. Although it may be too soon to expect a pivot in rate policy, investors turned their attention to the next FOMC meeting, searching for clues on the size and trajectory of the upcoming U.S. rate hikes.
The performance of Asian USD bonds has been on a downtrend for over a year, and this month was no exception. The iBoxx USD Asia ex-Japan Index fell 3.04% in October, as the index yield rose 63 bps to 7.37% and the index spread widened 34 bps to 306 bps.
As shown in Exhibit 1, the overall index and its major subindices (excluding China LGFV) are down significantly over the past 12 months, with the drops ranging from 13% in investment grade bonds to 56% in China real estate debt.
The investment grade (IG) subindex considerably outperformed the high yield (HY) subindex, by 5.59 percentage points, though both subindices declined this month. Moreover, negative performances were seen in mid- to long-dated IG bonds, while losses were seen across the curve in HY. Notably, the CCC-rated bucket in the HY segment—dominated by issuance from the China Real Estate sector—plunged over 20% in October.
