With Fed Chair Powell having signalled at the Jackson Hole Economic Symposium that the time has come for rate cuts, Asian credit conditions could be supported by easing financing costs. In particular, Hong Kong credit markets should benefit more from coming Fed rate cuts compared to other Asian markets, such as India or Indonesia. Hong Kong corporates' financing costs are more closely linked to USD rates, unlike South Asian corporates with very low dependence on USD debt. There is also a beneficial spillover through China. Fed rate cuts provide room for the PBOC to ease without spurring capital outflows. Further Chinese policy easing, by supporting mainland Chinese demand, would also benefit Hong Kong corporates.

Within the Hong Kong USD credit market, over 40% of outstanding bonds belong to the real estate and REITS sector. While Hong Kong real estate sector's leverage is not as stretched as counterparts in mainland China, the sector's aggregate credit spread is still wider than pre-pandemic levels. This is because of soft investor sentiment, falling home prices, elevated office and retail vacancy rates, and still high interest expenses. While the sector's credit spreads have narrowed from 2023 highs, there could be further compression on relief from lower rates going forward.

DBS Aggregate Credit Spread or DACS indices show the aggregate credit spread, weighted by market capitalization and modified duration, for Asian corporate USD-denominated straight bonds. The higher is the DACS, the higher is the additional yield that can be earned in credit, and the higher is the perception of credit risks in markets.

Our first visual shows the notional outstanding of bonds from five Asian economies that comprise the Asia ex-Japan (AXJ) DACS index. These five economies are China, Hong Kong, Korea, India and Indonesia.

The second visual shows the notional outstanding split into industry sectors for the aggregate AXJ DACS index, and DACS indices for each of the five economies. Individual economies can be selected via the dropdown.

Our last visual illustrates the DACS index readings over time for AXJ or an individual economy. It is also possible to drill into the constituent sectors of the DACS indices using the second dropdown. Such sectoral DACS indices are shown on an individual economy basis when data is sufficient, and on an aggregated AXJ basis when otherwise.