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Asian Credit Monitor: 2018 Portfolio Strategy, US Rate Trajectory, China Credit Gap

2017 was a decent year for EM bonds in general (both hard and local currencies), amidst strong portfolio/fund net inflows, higher risk appetite and a resultant stronger incentive to chase yield. Such bullish sentiment has been led by low volatility, giving rise to better than expected risk-reward. The market has regained its composure in the last 1.5yrs or so due to accommodative monetary policy (a slow Fed exit and even slower expected ECB/BoJ QE/QQE tapering), a recovery in commodity markets and alleviation in EM. The weak USD has also acted as an impetus to be long risky assets during 2017.

In 2018, we think there is merit in the risk-trade and markets can and will grind tighter.

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