How will US-China relations affect Asia’s emerging bond markets?

It’s fair to say that, at the start of 2016, few would have predicted we would end the year with US President-elect Donald Trump readying himself to move into the White House, and the British establishment at loggerheads over the form – hard? soft? somewhere in between? – that the country’s departure from the European Union should take. Add to this the odds of Leicester City winning the English Premier League, and one bookmaker was quoting potential winnings of £12.5 million (HK$119 million) on a stake of just £5. Even with sterling’s recent sharp decline a return like that is hardly to be sniffed at.

Following a bear market in 2015 for many parts of the bond markets, 2016 was more positive overall, despite significant volatility. As ever, central bank moves have proven pivotal. Since the US Federal Reserve hiked interest rates in December 2015 – the first time in almost 10 years – it held its fire for almost all of 2016, having just confirmed another 0.25 per cent rise that markets had already priced in.

At the other end of the scale, the European Central Bank (ECB) chose to extend its asset-purchase programme in March, while Britain also opted for further monetary stimulus – along with a rate cut – in August, as it changed course to counteract the perceived negative impact that the Brexit vote would have on the country’s economy.

Chinese government bonds to remain under pressure

Meanwhile, spreads on investment-grade credit and high-yield bonds have tightened, the latter substantially. High-yield defaults remain elevated compared to recent years, although this has been skewed by energy sector issuers. A gradual increase in the oil price should in any case reduce some of the pressure on these names. And after a torrid 2015 for emerging markets, the asset class experienced a far more positive ride in 2016, at least until Trump’s victory in November.