Credit: Negligible credit impact from taper

No repeat of 2013 Fed taper tantrums
Nathan Chow, Chang Wei Liang, Philip Wee26 Nov 2021
    Photo credit: Unsplash Photo

    The start of the Fed’s taper this month has proven to be of little impact for Asian USD credit. Asian credit resilience stands in marked contrast to the taper tantrum of 2013, which saw several vulnerable economies registering a large jump in sovereign CDS spreads. Asian economic and external fundamentals are certainly stronger today compared to 2013, while markets are also better primed for a taper given the precedent.  Our DACS indices show a slight widening in Indonesian and Indian USD credit spreads just after the taper announcement, but spreads had since tightened back to 2021 lows. Investors are perhaps relieved to witness the low volatility in Asian bond and FX markets, and are thus positioning more in Asian credit in response. Indonesia and India, which suffered disproportionately in 2013, have even seen their currencies strengthen somewhat since the start of November. Outflows stemming from the Fed’s taper are clearly not large.

    What about the risks of an accelerated taper and earlier Fed rate hikes in the face of persistent inflation? While there may be some yield headwinds if such a scenario pans out in 2022, we think the impact on Asian USD credit should prove manageable. Asian economies are set to make further progress in vaccinations and reopening their economies next year. Furthermore, the Fed’s balance sheet will still remain relatively large for some time, and USD liquidity will continue to be ample. On balance, risks to China credit also look to be more contained now given policy calibration on financing. All three factors should contribute to Asian credit resilience in 2022.

    Chang Wei Liang

    Credit & FX Strategist
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