Impacts of delayed interest rate ease

The outlook for interest rates in 2024 has shifted significantly in light of recent economic data. Initially, forecasts anticipated a total of 125 basis points in rate cuts throughout the year, starting with a modest 25 basis point cut expected in June and a more substantial 100 basis points in the second half.

Madhur Agarwal, head of DCM Origination Asia (excluding Japan), J.P. Morgan (left) and Puja Shah, head of Southeast Asia DCM & Sustainable Finance Asia (ex. Japan) J.P. Morgan

However, robust job growth and persistent wage increases have altered this trajectory. The US Federal Reserve’s broader economic tests are far from being met, making a July rate ease highly unlikely.

Instead, it is now projected that more data reports will be needed before the Fed considers easing, pushing the likely first rate cut to November.

This adjustment implies a quarterly cadence of rate reductions moving into 2025 as the Fed navigates the challenge of sustaining economic growth while curbing inflation pressures.

On the other hand, Asia credit markets have commenced 2024 robustly, registering a solid 1.4 per cent return in the first quarter for investors. Despite a 50 basis point rise in US Treasury yields, the impact was cushioned by a 45 basis point tightening in credit spreads.

Performance was broad-based, with Asia Investment Grade and High Yield credits outperforming their peers in developed and emerging markets. Supportive technical factors, such as modest primary supply and inverted US-China yields, remain in place.

Demand from commercial banks, insurance companies, private banks, and real money accounts has been strong, driven by attractive yield levels. As the year progresses, credit spreads are anticipated to widen by approximately 12 basis points by year-end, even as interest rates are expected to decline modestly. Despite this, the overall outlook for Asia credit remains promising, underpinned by attractive valuations and a favourable yield environment for yield-focused investors.

The Asia environmental, social, and governance (ESG) bond market, excepting Japan, is poised for continued development and increased sophistication in 2024. Leading this market are South Korean and mainland Chinese issuers, followed closely by those from India and Hong Kong. Green bonds remain the predominant instrument, with the largest issuance volumes coming from sovereigns and financial institutions. Sustainable financing volumes are expected to remain stable next year, underpinned by rising investments in green technology due to strong policy support, robust market momentum, and growing cost competitiveness. Further development of regulations is anticipated to address greenwashing concerns, enhancing market integrity and investor confidence.

A key area of focus for ESG-oriented investors will be impact and nature-related investments, which are set to unlock new opportunities. However, the evolving and fragmented regulatory frameworks for ESG investments, particularly in the US, present ongoing challenges.

Additionally, the potential need to pause the pace of energy transition due to geopolitical conflicts, such as the Russia-Ukraine war, adds another layer of uncertainty for investors.

In our projection, the bond market in 2024 is poised for a dynamic year, with distinct regional trends shaping the outlook.

In Asia ex-Japan, volumes are expected to cap the year at an impressive $125 billion. Financial Institutions Group (FIG) supply is anticipated to remain robust in the second half, while corporate issuers will tread more cautiously, seeking to diversify funding channels. With enhanced policy support, the Chinese property market might witness stabilisation in the medium term.

Southeast Asian countries will likely see a continuation of FIG and selective sovereign issuances. We anticipate a surge in liability management and high-yield issuance supply, driven by the region’s attractive and liquid onshore markets, though corporate issuances will remain selective.

South Korea is set to maintain a strong bond supply in 2024, with public bond issuance volume year-to-date hitting $19.9 billion, a notable 15 per cent increase on-year. This surge is largely fuelled by traditional FIG and quasi-sovereign issuances, but there is growing activity from various corporates, including new issuers.

The latter half of 2024 is expected to bring an uptick in non-bank financial institutions and corporate issuance activity. In India, the supply from FIG and non-banking financial companies is forecast to persist into the second half of the year. India’s onshore markets continue to be liquid and appealing, with corporate issuances, particularly in the renewable sector, poised to be selective.

Overall, the bond market in 2024 is characterised by regional nuances, bolstered by policy support and market liquidity. This creates a mixed yet promising landscape for investors and issuers, offering numerous opportunities while navigating varying regional conditions.

Interest rate anchoring in US supporting VND status The US Federal Reserve’s July interest rate rise by 0.25 percentage points, resulting in policy rates reaching a 22-year high, may not be the end of the matter given the recent trend of continuously lowering interest rates.

Interest rate cutbacks designed to assist borrowers Several Vietnamese banks implemented substantial interest rate reductions in 2023 to stimulate loan uptake across various sectors, despite challenges in meeting credit growth targets.

Exchange rate pressures could affect interest rates The VND/USD exchange rate has increased by 4.9 per cent since the beginning of the year, compared to an increase of 2.6 per cent for the whole of 2023. This exchange rate pressure is expected to lead to an increase in interest rates, according to the State Bank of Vietnam (SBV).