China Shows Its Pull Selling Dollar Bonds in Weak Market
(Bloomberg) -- China knew it would be marketing $3 billion of new dollar bonds in the midst of a trade confrontation and escalation in interest rates engineered by its top rival, the U.S. Officials might not have reckoned on selling amid a sudden investor flight from risk.
In what’s set to be an even bigger demonstration of China’s pull in the international bond market, initial signs showed little hit to buyer sentiment from the biggest sell-off in world stocks since February and a retreat from credit and emerging markets.
China is selling $1.5 billion of five-year notes at 30 basis points over Treasuries, while the size for the 10-year notes was set at $1 billion at a spread of 45 basis points, according to people familiar with the deal who asked not to be identified. That’s wider than where China’s 2027 dollar bonds were indicated on Thursday, but orders for the three-tranche issue total more than $17 billion so far.
The debut 30-year offering will be $500 million at 70 basis points over Treasuries.
“The bond issuance is more like a vote of confidence in China’s creditworthiness,” said Ziyun Wang, partner and senior portfolio manager at DeepBlue Global Investment Ltd.
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The sovereign’s latest offering comes amid a jump in benchmark 10-year Treasury yields to the highest since 2011, which in turn contributed to equity benchmarks tumbling around the world this week. The Shanghai Composite Index was down more than 5 percent, and Japan’s Topix Index lost more than 3 percent, in Thursday trading.
There were signs of stress in the credit world, too. The cost of insuring Chinese sovereign bonds against default for five years jumped to a three-month high. And Chinese investment-grade bond spreads have widened in response, according to traders.
When China resumed sales of dollar bonds last year after a hiatus of more than 13 years, market players saw it in part as a move to reduce offshore borrowing costs for corporate Chinese issuers. That hasn’t really happened, however.
“Last year’s offering proved to be the high-water mark in sentiment, and China’s blue chip SOEs have underperformed U.S. credit this year," said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group. "This year’s deal may not help reverse that."
Even so, Angus To, deputy head of research at ICBC International, expects the new bonds to attract strong orders, because they offer an attractive yield pickup over the existing ones.
China sold $1 billion each of five and 10-year bonds in late October 2017. The two tranches, which were priced at premiums of 15 and 25 basis points, were indicated at 26 and 41 basis points at 1:51 p.m. in Hong Kong, according to data compiled by Bloomberg.
Regular issuance of U.S. dollar bonds by the sovereign would still help establish a reference yield curve for state-owned companies. That may be helpful to Chinese issuers as they seek to refinance some $104.2 billion of dollar notes set to mature through 2019, according to data compiled by Bloomberg.
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“The fact that the China sovereign bond is coming today as planned against the very weak market backdrop -- with U.S. equities tumbling overnight means demand is very likely well anchored," said Anne Zhang, executive director for fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co.
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