How might the U.S. election and China’s stimulus package affect Asian fixed income?

Key takeaways

• The U.S. presidential election result introduces uncertainty regarding trade policies that may initially pressure Asian economies.
• China's significant pro-growth policies are expected to stabilize its credit markets and support GDP growth.
• Asian markets are reacting very differently to the U.S. election result and China's stimulus, with some regions signaling growth opportunities and others facing challenges from potential tariff hikes and currency depreciation.
• Asian fixed-income markets are overall expected to remain resilient, supported by regional fiscal and monetary policies aimed at mitigating potential risks.

The U.S. presidential election concluded with a victory for Donald J. Trump and the Republican Party across both the House of Representatives and the Senate. While uncertainty surrounding the new administration’s trade policies should initially pressure Asia, we’re also likely to see both resilience and opportunities across Asian fixed-income markets, with China’s monetary and fiscal stimulus package potentially providing a key macro offset.

This election result will initially pressure Asian economies due to uncertainty around the incoming administration’s trade policies that will, in our view, include the likely escalation of tariffs. For now, the extent of tariff policy changes and potential “deals” that can be made to mitigate such moves remain to be seen.

Nevertheless, since the end of September, China has proactively launched pro-growth policies, with further announcements made at the National People’s Congress (NPC) meeting concluding on November 8, including a 10 trillion yuan package aimed at refinancing local government debt. This much-anticipated restructuring package raised the local government debt ceiling by 6 trillion yuan in total (2 trillion yuan each year from 2024 to 2026) and allocated 800 billion yuan out of the annual local government special bonds issuance quota for debt resolution from 2024 to 2028, totaling renminbi (RMB) 4 trillion.

While the magnitude of local government debt resolution is higher than expected, the market was slightly disappointed with the package, given elevated expectations prior to the NPC meeting. Importantly, detailed plans around additional policy support for bank recapitalization, consumption, and the property sector are still in the works.

Despite this, we believe the authorities have clearly signaled that more forthright fiscal stimulus should be introduced in 2025. China’s credit markets are expected to trade in a relatively stable range going into year end, especially given the relatively contained overall reaction to the U.S. election result. We believe these latest measures illustrate that combating deflation is becoming a priority and should be sufficient to lift China’s GDP growth closer to its 5% target for 2024.

Looking ahead to the Two Sessions meeting in March next year, the Chinese government, with a better assessment of the potential impact of the incoming administration’s China/trade policies, will be in a stronger position to muster sufficient fiscal-monetary measures to anchor macro stability. Overall, we believe such policies could help to mitigate potential risks in China and benefit the region more broadly.

Outside of China, the region’s central banks have been easing their respective monetary policies in line with the U.S. Federal Reserve (Fed). The pace of such easing will likely be more cautious, given their desire to maintain currency stability. Looking ahead, we believe that expansion in fiscal policy from China and the United States, together with a potential resolution of the Russia-Ukraine conflict, could be positive for growth in 2025.

Asian markets’ reaction

Asian markets reacted to the U.S. election result with some spread tightening in investment-grade (IG) credit driven by all-in yield buyers seeking to partially offset higher U.S. Treasury yields. Asia high yield (HY) traded with a mildly weaker tone in November (after an exceptionally strong performance year to date (YTD)). The JP Morgan Asia Credit Index was down 0.15% month to date (with HY slightly underperforming IG), which is reasonable given the backup in yields over this period. Asian local markets are underperforming due to greater pressure from a stronger U.S. dollar (USD) combined with higher local yields.

Despite the potential for increased volatility, we believe Asia's fixed-income markets will likely be resilient and should present opportunities as they weather the incoming U.S. administration’s policy approach to the region. Within the U.S. economy, the risks of additional fiscal stimulus, tax cuts and tariffs, and immigration policies have been priced into markets during recent weeks (yields on the benchmark 10-year yield rose by 80 basis points (bps) from their lows in September). 

The backup in yields offers attractive entry points, particularly for all-in yield investors. Meanwhile, economies such as India and China could present alpha opportunities from step-up policy response and the structural growth story, as highlighted in our previous report Asian Credit: Three themes should propel returns in 2H 2024.

Asian credit markets continue to hold value

Asia IG spreads remain expensive both from a historical viewpoint and relative to U.S. IG credit; however, the lack of supply in Asia and net redemption trend of the market will remain key drivers of demand for Asia IG in the coming year. This theme should continue to support demand into 2025.

We continue to see value in Asia HY, even after strong YTD performance. However, the Asia HY market will likely be more sensitive to developments from China’s NPC meetings and the potential for Chinese policymakers to respond with a stronger fiscal stimulus package to offset the possible impact of higher U.S. tariffs.

Most Asia-based global corporations should be fundamentally more prepared for geopolitical risk after experiencing the Republicans’ previous administration by having adjusted their global supply chains to mitigate the impact of higher tariffs. Demand for Asia credit is predominately driven by regional and local investors that should moderate volatility induced by any potential U.S.-led investment sanctions.

Increased caution on Asian local rates

In local rates and currency markets, the outlook for a stronger USD and upward pressure on U.S. Treasury yields feeding back into Asia makes us more cautious. On the other hand, markets such as India will continue to provide relative value opportunities: Since it’s more politically aligned with the United States, with an economy that’s less export dependent than most other Asian economies, India is likely to be more insulated from potential U.S. tariffs.

Mainland China and Hong Kong markets remain resilient

The impact of the U.S. election result on Chinese markets was more muted than feared. As investors were defensively positioned in the run-up to the election and kept large amounts of cash on the sidelines, market technicals remain constructive into year end. With more diversified sales and supply chains, China’s economy is less reliant on the U.S. market than during the previous China-U.S. trade war. 

China’s onshore bond yields rallied (bull steepening) and outperformed global rates in the year to October. The People’s Bank of China is expected to ease rates by a further 20bps into year end, subject to policy effects and the Fed’s interest-rate path. A steep (or stable) Chinese government bond (CGB) yield curve offers investors strong carry and positive roll-down returns. We maintain a positive duration view and expect the 10-year CGB to range between 2.00% and 2.25% into year end. We also maintain a constructive view on Chinese credit beta on the back of expansionary policy from China and the United States and potential upside from stabilizing global conflicts.

The Chinese yuan renminbi offshore (CNH) weakened by around 1% to 7.2 against the USD in November, broadly tracking moves in both the U.S. Dollar Index and U.S. rates and showing no signs of significant disruption. In our view, the CNH is expected to remain in the broad range of 7.10–7.30 against the USD until Q1 2025, when U.S. trade policies become clearer; we remain neutral on CNH.

The impact on Hong Kong dollar (HKD) rates going forward will likely come from market expectations around the path of U.S. inflation and Fed rate cuts. Nevertheless, HKD rates have outperformed U.S. rates YTD, driven primarily by local factors, such as local liquidity and demand-supply dynamics. 

Singapore’s local markets brace for potential tariff hikes

Singapore’s very open economy makes it vulnerable to any increase in U.S. tariffs. At its October policy meeting, the Monetary Authority of Singapore (MAS) highlighted that “a sharp escalation in geopolitical and trade conflicts could exert sizable drags on global and domestic investment and trade.”  If the economy experiences increased external pressure and uncertainty, there’s a high likelihood that the MAS will make a dovish pivot in January 2025.

10-year U.S. Treasuries and Singapore government securities (SGS) differentials were rangebound for most of 2024. The backup in yields after the election result saw the differential widen to near 2023 levels. In the short term, we think SGS yields should continue to move in tandem with U.S. Treasury yields but with a lower beta. We also believe that U.S. Treasury and SGS differentials could narrow when the MAS turns more accommodative on policy.

In currency terms, considering that MAS policy targets the Singapore dollar nominal effective exchange rate, and China is Singapore’s biggest trading partner, we expect broad USD strength. Investors' expectation of RMB depreciation could potentially put pressure on the Singapore dollar, with investors often viewing the latter as a proxy.

India’s local markets: still going strong

India remains attractive in terms of fundamentals and relative value across the region. The government is committed to fiscal discipline, and its current account and fiscal deficits remain stable. Any easing in energy prices following the policies of the incoming administration would be positive for India. For now, the Reserve Bank of India remains cautious about reducing benchmark rates.

Indonesian local markets face currency risks

The Indonesian market reacted negatively to the U.S. election result: While some yield moves had already occurred in the weeks before the election, both 5-year and 10-year bonds saw a further spike in yields as investors became more cautious postelection.

The primary factor behind these bond yield movements was the Indonesian rupiah (IDR), which depreciated to 15,850 levels before stabilizing back below 15,800 versus the USD. Bank Indonesia (BI) stated that it would monitor the currency move closely, indicating that any significant depreciation could delay rate cuts in Q4 and result in elevated short-end yields. However, we think BI should cut rates whenever possible, given the benign inflation and slower GDP growth seen in Q3.

Malaysia’s local markets remain neutral

Malaysia’s economic fundamentals have remained unchanged since the middle of the year, with expectations for robust growth and moderate inflation in 2025. Against this backdrop, we expect the overnight policy rate (OPR) to remain flat (at around 3.00%) for the rest of 2024 and most of 2025.

Given a lack of local catalysts, it was U.S. Treasury sentiment that mainly influenced Malaysian government securities (MGS) yield movements. The recent backup in MGS yields translates to improved valuations and better entry points for investors, particularly given the flat OPR outlook for 2024 and 2025. We maintain a neutral view on the Malaysian ringgit (MYR) bond market over the medium term, with short-term volatility.

In addition, MYR movements are driven primarily by external factors (especially USD rates), and the MYR depreciated against the USD by 6.6%, from 4.12 as of the end of September to 4.45 as of November 13 (after the U.S. elections). Domestic economic reforms and restructuring still support the MYR's longer-term outlook, though we expect short-term volatility and some degree of drag from Chinese RMB depreciation.

Philippine local markets sell off and turn cautious

Philippine (PH) bond yields rose alongside U.S. Treasury yields mid-month. As expected, volatility was elevated, with the market quickly selling off as it became apparent that Republicans were holding the lead while votes were counted on the day.

The U.S. yield curve steepened as the PH local yield curve flattened, with 5- to 7-year duration local bonds taking the biggest hit. Selling interest was dominated by local dealers and some offshore real money accounts. Furthermore, the market is likely getting anxious about additional supply from a looming Retail Treasury Bond auction: Government bond spreads have substantially narrowed since the massive U.S. Treasury sell-off from September as local inflation continues to ease. 

The primary catalyst for global markets remains the direction of the Fed’s interest-rate cuts. Investors will watch for any hawkish rhetoric, which could send global and local yields another leg higher. Although weaker-than-expected GDP growth may urge the Bangko Sentral ng Pilipinas to continue easing monetary policy, there is a risk of any cut being delayed if a weaker peso persists following the election result.

Preparing for opportunity and volatility

We continue to see value in Asia HY but are more cautious on Asian local rates in the near term following the election result, given upward pressure on the USD.

Due to the Chinese government’s fiscal and monetary stimulus package, we believe that markets in Mainland China and Hong Kong will remain resilient. While Singapore braces for potential tariff hikes, we think SGS yields should continue to move in tandem with U.S. Treasury yields but with a lower beta. India remains attractive in terms of fundamentals and relative value across the region. The Indonesian market saw bond yields rise, driven by a depreciating IDR, as investors turned more cautious. Philippine local bonds similarly saw higher volatility, while further monetary easing may be delayed if a weaker peso persists.

Overall, the reaction of Asia’s fixed-income markets to the U.S. election result has been broadly contained, particularly in the Asian credit market. Looking ahead, Asian governments appear ready to stabilize economies with pro-growth monetary and fiscal policies to counter possible changes to U.S. trade policy. We expect the Fed to persist with its interest-rate easing cycle in the near term and that Asian fixed-income markets should largely remain resilient. At the same time, we remain vigilant about potential U.S. policy shifts and their impact on global growth and inflation. We’ll continue to closely monitor and hedge against the risks of higher bond yields and increasing market volatility across our portfolios where appropriate.

All data as of November 13, 2024. Source: Bloomberg.