Asia's Scorching Dollar Bond Rally Showing Signs of Strain

(Bloomberg) -- A surge in Asian dollar bond sales is testing investor appetite after the market’s best rally in years.

Orders for dollar bonds in Asia excluding Japan eased to 4.2 times their issuance sizes in April, the weakest this year, amid the highest monthly sales so far in 2019. That follows the best quarter on record for dollar bond orders, according to data compiled by Bloomberg using available deal statistics.

Asian dollar bonds drew manic demand from yield-starved investors for much of the year after the Federal Reserve’s dovish pivot and China’s policy loosening. That catapulted the market to its strongest first quarter in a decade in a comeback from last year’s turmoil. But some investors are becoming cautious, with DeepBlue Global Investment saying they are turning more defensive.

Valuations have gone “from cheap to fair at the end of the first quarter after the great run this year,” said Leong Wai Hoong, a senior portfolio manager at Nikko Asset Management Co. in Singapore. “It’s normal to see investors take a breather for now. The primary market is getting tougher and it’s hard to see much relative value on the curves at the moment.”

Asia's Scorching Dollar Bond Rally Showing Signs of Strain

Read more: Asian Dollar Bond Spreads Tread Water After Issuance Bonanza

Average spreads on Asian dollar notes slid about 63 basis points so far this year to rack up returns of 5.4 percent following losses in 2018, Bloomberg Barclays indexes show.

“Going forward we still have to see whether the China economy can hold up and property sales can sustain the momentum, and how U.S. macro data turns out. The heavy supply problem is still there,” said Roy Kwok, a partner and senior portfolio manager at DeepBlue Global Investment in Hong Kong. “Valuation now is almost back to the heyday around early 2018.”

China suffered from a tumble in government bonds, along with sinking stocks and a weakening yuan last month. The first official gauge of China’s manufacturing sector fell in April, signaling that the economic stabilization seen in the first quarter remains fragile.

China is considering delaying a trip by its top trade negotiators to Washington this week, according to people familiar with the matter, after U.S. President Donald Trump threatened the country with steeper tariffs over the pace of trade talks.

Summer Lull

Volatility in China and Hong Kong stocks have started to impact sentiment, while the bond market typically enters a lull over the approaching summer months, said Steve Wang, deputy head of research at BOC International.

Investors are also growing increasingly bearish on emerging markets, evident from the reversal to outflows in bonds and equities, according to Oversea-Chinese Banking Corp., citing data from the bank and EPFR Global.

“Cash levels in the market are fine but one needs to keep a close watch on inflows, which are tapering off a bit,” said Shankar Narayanaswamy, head of credit strategy at Standard Chartered Plc. Concerns on the demand would come from macro worries and valuations of the bonds, he added.

©2019 Bloomberg L.P.