Investors in Asian dollar bonds, who just suffered the biggest first-half loss in five years, see little chance of a recovery any time soon.
Cash-starved Chinese issuers are flooding the market with supply and default risks are rising, just as the Federal Reserve’s tightening cycle pressures credit markets globally. For Pictet Asset Management and HSBC Global Asset Management, those are reasons to be wary that the losses through June — 2.7%, according to a Bloomberg Barclays Index – may have further to run.
It’s a far cry from 2017, when Chinese demand for Asian dollar bonds underpinned record issuance and the best returns in three years. These days, buyer appetite is on the wane as China heads toward a record year of corporate defaults amid a weaker yuan, and a looming trade war with the U.S. that threatens the world’s second-largest economy.
“Offshore corporate bonds will remain volatile in the second half because of the imbalance of demand and supply,” said Cary Yeung, Hong Kong-based head of greater China debt at Pictet Asset Management.
Chinese borrowers, which make up about 60% of the Asian dollar bond universe, are rushing to sell notes as a government deleveraging drive curtails onshore funding. Their willingness to pay up for the cash has led to a “repricing of the credit curve,” said Yeung.
Those issuers have sold about $90 billion of dollar bonds so far this year, close to 90 percent of the record issuance in the same period in 2017, Bloomberg-compiled data show. That’s even as average junk bond yields for Chinese firms are about 280 basis points higher since July 2017, according to ICE Bank of America Merrill Lynch Indexes.
Exacerbating the steady stream of bond supply is a shrinking investor base. Chinese banks, the dominant buyers of the country’s offshore dollar bonds, have already turned cautious. And losses incurred so far this year will further deter them from making investments, said Yeung.
Dollar bonds from China led declines for the region’s junk bonds in the last quarter at 3.4 percent, faring worse than investment grade peers. That’s in contrast with the U.S., where blue-chip company debt has been the worst-performing part of the credit market.
No Respite
For Anitza Nip, Hong Kong-based head of fixed income research Asia at Swiss private bank Union Bancaire Privee, the highest Asian dollar junk bond yields in two and a half years are no reason to buy.
“That may not be a sign that the market will stop widening,” Nip said. Moves are expected to be exaggerated in the coming summer months when primary issuance is quieter and trading is thin, she said.
HSBC Global Asset Management sees some chance that higher yields will start scaring issuers away, helping improve the supply-demand imbalance.
“More selloff could be expected if default cases pick up in the second half of the year,” said Alfred Mui, head of Asian credit at HSBC Global Asset Management. “There is a level even issuers won’t get into the market, and we are currently pretty much getting to this level. For some solid ‘bb’ names, I think 8 percent is the clearing level.”
And Goldman Sachs Group Inc. says that while there’s value in BB-rated bonds, the second half is not the right time to buy the lowest-rated credits.
“Worries about a credit crunch in China, the sizeable sell-off in Asian equities and the weakening of the yuan had a negative impact on investor sentiment,” Goldman said in a recent note. “Unless such concerns subside, market sentiment is likely to stay cautious.”
UBP and HSBC AM both reckon credit differentiation will continue to be the key and advise clients to stay on short duration, especially for their high yield investment. — Bloomberg

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