The ongoing global rally in corporate bonds, pushing credit spreads to their tightest levels in 22 months, persisted in Asia on Thursday, fueled by dovish signals from the Federal Reserve. According to traders, yield premiums on Asian investment-grade dollar notes narrowed by at least two basis points, bringing them close to record lows reached last week, as indicated by a Bloomberg index.
On Wednesday, spreads on global corporate bonds tightened to their lowest since early February of the previous year. This followed quarterly projections from Fed officials, revealing expectations of a 75-basis-point rate cut next year.
The lack of resistance from Fed Chair Jerome Powell against the growing expectations for rate cuts in the coming year, coupled with indications that policymakers are shifting their focus to when to cut rates amid slowing inflation, triggered a broad rally in bonds and risk assets.
The ongoing tightening of corporate spreads in December is extending the outperformance of credit compared to government debt in 2023. However, the tightness of spreads is expected to face challenges as global issuance markets gear up for aggressive activity next month, particularly in January—one of the biggest months for companies to tap debt markets with new bond deals.
Mark Reade, Head of Fixed-Income Desk Research at Mizuho Securities Asia, noted, “The path of least resistance for Asian credit spreads is tighter as we head into year-end” following a dovish Fed. However, he cautioned, “With valuations already stretched, global growth set to deteriorate, and the primary pipeline ready to explode in January, we doubt 2024 will be smooth sailing for Asian credit investors.” The remarks highlight concerns about the potential challenges and uncertainties in the credit market in the coming year.
