After Years of Breakneck Growth, Asia Dollar Bonds Slow Down

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It’s been a rip-roaring ride for bond dealers in the market for Asian debt the past several years, with record issuance coming so fast that some investors complained they didn’t get a proper chance to vet the securities.

Now the market’s looking a little more earthly. As seen in fixed income round the world, sales came off the boil in the last two months as worries over short-term funding costs, trade tensions and the outlook for tech giants stoked volatility.

Trade wars in particular could hit Asia, with tit-for-tat U.S. and Chinese tariff hikes disrupting the region’s supply chains and casting a cloud over growth and credit quality. That’s the top concern for investors in Asian bonds, who have turned underweight for the first time in three years, according to a survey by Bank of America Merrill Lynch.

It all means a new normal for the market after gung-ho sentiment propelled a record $322 billion of issuance in 2017 and carried over to the strongest-ever start to a year in 2018 before sales slowed.

Showing Cracks

Asia dollar bond market starts to lose momentum after record issuance

Source: Bloomberg

“Investors have been taking a more cautious approach,” said James Arnold, head of Asia Pacific debt capital markets at Citigroup Inc. in Hong Kong. “This has seen issuance dry up, but a part of this will be issuers readjusting to the new issuance spreads that investors are demanding, and as this equilibrium returns, then we would expect to see issuance return.”

Read here about how headlong bond sales in 2017 stoked concerns among some market players.

Dollar bond sales from Asian institutions plunged 37 percent in March to $23.3 billion from a year-earlier period, according to data compiled by Bloomberg. The flip side is that some investors like the prospect of this becoming less of a sellers’ market.

“After the recent price moves we are starting to see pockets of value in credit,” said Jimond Wong, a senior portfolio manager at Manulife Asset Management (Hong Kong) Ltd. Among investment-grade credit, he’s cautious on weaker Chinese local government financing vehicles and regional governments, and expects a further correction in some property and industrial borrowers.

Here’s some further views from market participants.

BOCOM International (Asia) Ltd. (Joanne Wong):

  • “Investors do have a choice of what to buy, so credit differentiation is crucial. We usually recommend especially for first-time issuers that they follow up with timely financial updates.
  • We have seen an increase in inquiries for offshore bond issuance and particularly from certain sectors which are facing either climbing funding costs onshore or have been unable to obtain approvals to issue onshore bonds” in China.

Citigroup (Arnold):

  • “We would expect a number of borrowers look to complete their first-quarter funding needs as soon as they see some stability return to markets.” Along with regular issuers in April and May, “we would expect there to be a significant volume printed in the lead-up to summer.”

JPMorgan Asset Management Inc. (Shaw Yann Ho)

  • Sees a weakened technical backdrop for Asian fixed income, driven by concerns about rising rates and strong risk appetite shifting flows into equities. Favors short-dated Chinese real-estate bonds as they are less sensitive to Treasury movements, while offering higher carry to cushion volatility
  • Overall, is still constructive, as an accommodative central-bank backdrop continues to support risk assets in the near term. Continues to be long credit and cautious on rates
  • Favors the big four Chinese banks, based on constructive view of their strong fundamentals, including stable capital ratios and attractive valuations of specific issues.

Invesco Hong Kong Ltd. (Ken Hu)

  • “The short term, and April in particular, could be more volatile than the first quarter because of trade tensions between China and the U.S., which may escalate.”
  • Adopting a more-defensive strategy by holding more cash and reducing duration
  • Avoiding Chinese technology, media and telecommunications names, whose risks are still under-priced by the market as U.S. President Donald Trump ramps up allegations on intellectual property rights
  • Bad market sentiment would create a ripple effect on on investment-grade Asian dollar bonds, he said. “So we are more cautious on Asia’s dollar bond market, until the November mid-term election in the U.S.”

Manulife Asset Management (Wong):

  • “We started the year rather defensive on both credit and duration. We are more inclined to add risks down the credit curve, but remain cautious on duration in the medium-to-long term.
  • We think the recent price action on perpetuals is overdone and some of them with significant step-up are becoming quite attractive.”

TwentyFour Asset Management (Felipe Villarroel):

  • “A trade war would hit Asia harder than other emerging markets, given China’s dominance on the region’s economy.
  • Dollar-denominated Asian bonds are quite expensive compared to other parts of EM for similar ratings and duration. We started allocating more heavily to emerging markets around 18 months ago, and since then our largest overweight within EM has been Latin America.”

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