Asia’s Hot Junk Bond Market May See a Surge in Sales Next Month

Asia’s junk bond market has been on a tear and if recent history is any guide could be set for a very busy return after year-end holidays.

January was the biggest month for junk dollar note issuance from Asia in 2019 and 2018. Laos, which has some of the lowest sovereign debt ratings in the region, put off a benchmark dollar bond offering until early 2021 on Friday.

If it does indeed go ahead, that would add to a group of borrowers looking to sell debt after a rally in credit markets pushed down borrowing costs since the spring. Spreads on Asian high-yield dollar bonds tightened for seven straight weeks through Friday, the second-longest rally in 2020. Read more about what top-performing credit funds are forecasting for Asian junk debt.

Asia’s Hot Junk Bond Market May See a Surge in Sales Next Month

Asia high-yield dollar bonds have returned about 20% since the end of March, just shy of U.S. peers. The rally came after the Federal Reserve and other global central banks stepped in earlier this year to shore up markets that had convulsed on concerns about the pandemic.

It remains to be seen if the issue with the offering from Laos, which is rated CCC by Fitch, had more to do with timing or credit risk. Some investors continue to favor emerging-market frontier sovereign debt for 2021 amid low U.S. interest rates and expectations for economies to rebound next year as vaccines get rolled out.

Asia

Asia high-yield bonds still offer a pick-up of about 275 basis points over U.S. junk notes, more than three times the average over the past decade, making them attractive to some buyers. That said, speculative-grade companies globally face heightened default risks going into 2021 as some countries withdraw supports put in place at the start of the pandemic.

  • Amid some broader risk-off sentiment on Monday as markets processed the latest pandemic news, the Markit iTraxx Asia ex-Japan Investment Grade credit-default swap index widened about 0.5 basis point, according to traders
  • Japan CDS increased about 0.75 to 51.75, while the Australian index widened 0.5 basis point, traders said
  • Dollar bond spreads were little changed

U.S.

Economic pain abounds, yet bonds backed by loans to the riskiest American consumers are getting swallowed up by investors, setting 2021 up for a rush into lower-quality debt.

  • Scott Minerd has issued a series of dire warnings this year, from seeing a chance of a global depression to the prospect of the S&P 500 collapsing to 1,200 as the Covid-19 pandemic unfolded
  • For deal updates, click here for the New Issue Monitor

Europe

Europe’s nine-month credit rally from the depths of the coronavirus crash last March is likely to continue at least through 2021, albeit at a slower pace.

  • JPMorgan says euro investment-grade spreads will retreat around 17 basis points and high yield will tighten around 50 basis points by the end of 2021
  • Morgan Stanley sees high-grade corporations issuing around 320 billion euros ($390 billion) of new bonds next year, well short of the 400 billion of euros sold in 2020

©2020 Bloomberg L.P.

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