An all-out trade war won’t impact the performance of Asian hard currency fixed income, according to Credit Suisse.

The Swiss private bank noted in a commentary that with the growing number of domestic participants in the Asia USD bond marketplace, as well as issuers largely exposed to local rather than trade-related risks, Asian USD bonds would mostly stay unaffected.

It believes the biggest external impact on Asia USD bonds will be from high sensitivity to global government bond yields.

‘In fact, in such a scenario, safe-haven demand for US Treasuries might surge and lead to an outperformance of long-dated Asian bonds,’ said Apac investment strategists Julian Choon Ann Wee, Eddy Loh and Suresh Tantia.

Credit Suisse has an 'outperform' call on Indonesian USD sovereign bonds, and an 'underperform' rating for the Philippines. It is neutral on the rest.

Asia USD corporate high yield and investment grade returned 0.2% and -0.7%, respectively, in January. EM local currency bonds, on the other hand, returned 4.5%.

According to Citywire Discovery data, emerging markets global hard currency bond funds registered in Singapore and Hong Kong received $14.79 billion in net flows between February 2017 and January 2018.

Rising US trade deficit, which was 16% higher in January than a year earlier, has prompted US president Donald Trump to deliver on election promises and impose tariffs on steel and aluminium imports earlier this month.

The Credit Suisse strategists noted that an all-out trade war, if China retaliates, could significantly affect Asian local currency bonds due to the impact on Asian currencies.

‘While China will hesitate to use the RMB [renminbi] as a tool to retaliate against the USA, the deterioration in growth fundamentals and market sentiment could still drive capital outflows and lead to RMB depreciation,’ the authors said.

If China’s response is symbolic, they noted, local currency bonds will be supported due to the broader regional growth story.

In particular, export-oriented currencies such as the Korean won, Singapore dollar and Thai baht may continue to appreciate against a weakening US dollar and local currency markets with large presence of foreign bondholders will remain supported.

The Swiss private bank is negative on Thailand as well as Malaysia, and neutral on Chinese local currency sovereign bonds.

‘For China, policymakers would also continue to tolerate CNY [Chinese yuan] strength as the country persists with financial market reforms.’

Emerging market local currency bond funds registered in Singapore and Hong Kong received $15.93 billion between February 2017 and January 2018, according to Discovery.