China Junk Bonds May See More Losses After Yields Jump to 8%

(Bloomberg) -- The average yield on China’s junk-rated dollar bonds rose above the 8 percent mark, fueling concerns of further gains amid a bulging issuance pipeline and the absence of a strong demand from mainland investors.

Yields on dollar junk bonds from Chinese firms rose to the highest since April 2016, while those from the broader region yielded 7.4 percent, according to ICE BofAML Indexes. It took just 43 days for China’s average yield to rise from 7 percent to 8 percent, after having taken more than four months for the move from 6 percent to 7 percent. BNP Paribas Asset Management expects credit spreads in the region to widen by a further 25-50 basis points.

“There is a pipeline for supply in Asia yet to materialise,” said Alaa Bushehri, London-based head of global EM corporates at BNP Paribas Asset Management. As issues price at wider spreads, there is a knock on effect to the secondary market which results in weaker sentiment and the expectation of higher rates this year, she said.

Chinese high-yield borrowers have seen their funding costs increase as much as 2 percentage points so far in 2018. The last time the yield on Chinese dollar junk bonds rose over 8 percent was after a equity rout in early 2016 that wiped out $5 trillion in market valuation.

Rising yields could help rebalance the market as some issuers may find the current borrowing cost of dollar bonds unattractive, prompting them to either postpone issuance or obtain funding from alternate channels, according to Paul Lukaszewski, head of Asian corporate debt and emerging market credit research at Aberdeen Standard Investments Ltd. in Singapore.

China’s speculative-grade issuers sold a record $15.8 billion in dollar bonds this year, up 12 percent from the same period last year, according to Bloomberg-compiled data.

“The Asian dollar bond market has been seeing less investment appetite from the Chinese onshore funds recently given the comparatively better return from domestic bonds and a stable yuan against the dollar,” said Sebastian Ha, head of the debt syndicate at Bank of China in Hong Kong.

Earlier stories:

  • Goldman Sachs Says Don’t Buy Dip in Asian Dollar Bonds
  • China Property Junk-Rated Issuers Undeterred by Rising Yields
  • Asian Junk Bond Weakness Seen Stoking Outflow Worries, ANZ Says
  • JPMorgan Warns of Losses Amid Torrent of China Property Bonds

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