The recent divergence between Asia’s investment-grade and riskier bonds is poised to continue, analysts say, as investors turn sour on Chinese developers.
Yields for Asia’s high-yield dollar bonds rose 41 basis points in the second quarter, according to a Bloomberg Barclays index, versus a 5 basis-point decline for investment-grade debt. They’ve increased for six straight weeks, the longest stretch since 2018, driven by a roughly 150 basis-point increase for Chinese high-yield dollar notes.
Issuance of junk-rated dollar-denominated corporate debt in Asia is dominated by China, with property firms making up a large chunk. The government’s campaign to cut leverage and toughen up its corporate sector has helped pressure Chinese high-yield dollar bonds, along with developments such as uncertainty surrounding big issuers China Evergrande Group and investment-grade firm China Huarong Asset Management Co.
“Diverging borrowing costs have been mainly driven by waning investor sentiment in the high-yield primary markets, particularly relating to the China real estate sector,” said Conan Tam, head of Asia Pacific debt capital markets at Bank of America. “This is expected to continue until we see a significant sentiment shift here.”
That shift might come courtesy of the property industry, which has been leading this year’s record pace in China’s onshore bond defaults. Evergrande, Asia’s largest issuer of junk-rated dollar bonds, told Bloomberg News that as of June 30 it met one of the “three red lines” imposed to curb debt growth for many sector heavyweights. “By year-end, the reduction in leverage will help bring down borrowing costs” for the industry, said Francis Woo, head of fixed income syndicate Asia ex-Japan at Credit Agricole CIB.
Spreads have been widening for Asian dollar bonds this year while they’ve been narrowing in the U.S. for both high-yield and investment grade, said Anne Zhang, co-head of asset class strategy, FICC in Asia at J.P. Morgan Private Bank. She expects Asia’s underperformance to persist in this quarter, led by Chinese credits.
“However, as the relative yield differential between Asia and the U.S. becomes more pronounced there will be demand for yield that could help narrow the gap,” said Zhang.
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July 04, 2021 at 06:00AM
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China to Keep Dragging Down Asian Junk Bonds Versus High Grade - Bloomberg
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