Asian Borrowers Close In on Record for Dollar Bond Issuance

(Bloomberg) -- Borrowers from Asia are ramping up dollar debt sales again and are on the cusp of exceeding the full-year record for issuance.

Issuers from Asia ex-Japan have sold over $323 billion of notes in the U.S. currency so far this year, compared with $326 billion for all of 2019 -- the current all-time high, according to data compiled by Bloomberg. Chinese borrowers led the charge last week following an initial lull after the U.S. election.

Borrowers globally have sold unprecedented amounts of debt this year as they gird against the economic impact of the pandemic and take advantage of ultra-low borrowing costs. Credit markets have largely rallied since the end of March on the back of central bank stimulus. But the recent surge in coronavirus cases in many nations is keeping investors on edge, even as they weigh coronavirus vaccine results.

Dollar notes from Asia continue to offer higher premiums than their U.S. peers because Asian borrowers don’t directly benefit from Federal Reserve bond purchases. Junk bonds from the region pay spreads about 300 basis points more than their U.S. counterparts on average, near the highest since 2011.

Read more on global dollar bond issuance here.

Investors should focus on the historically-elevated premiums on both Asian investment-grade and high-yield dollar bonds over peers elsewhere, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

The Fed’s commitment to a loose monetary policy will likely continue to drive corporate bond issuance globally. The central bank signaled in September that rates would stay near zero for at least three years, after the pandemic sparked the worst economic slump since the Great Depression.

In Asia, analysts and bankers say that they expect debt sales to remain elevated going in to 2021. More bonds mature next year and borrowing costs are well below their five-year average. Goldman Sachs Group Inc. forecast earlier this month that sales by Asian issuers across dollars, euros and yen would hit a record again next year.

Asia

The primary market in Asia got off to a subdued start Monday. The only issuer offering dollar notes was Jingrui Holdings Ltd. at guidance of about 14.625%, while China Gezhouba Group Co. mandated banks for investor calls for a potential perpetual deal.

• Despite widening on some Chinese state-owned enterprises, spreads on Asian investment-grade dollar were mostly little changed Monday, according to a trader. The premiums ended last week lower, despite rising Thursday and Friday
• Recent payment defaults in the onshore Chinese market were in focus for investors at the end of last week, according to a report by Goldman Sachs. The U.S. bank said it doesn’t expect systemic concerns to arise, but that it reflects a shift by policymakers in China away from forbearance toward a “credit cleanup mode”
• Goldman Sachs expects the Asia HY corporate default rate to tick up to 4.3% in 2021 from an estimate of 4.2% for this year
• Korean asset management funds are launching their first ESG funds

U.S.

Investors should reduce some of their exposure in high-yield bonds and diversify their income sources as the junk-bond rally is unlikely to see spreads tighten much further, according to Janet Rilling, senior portfolio manager at Wells Fargo Asset Management.

• Junk-bond investors poured $4.56 billion into retail funds during the week ended Nov. 11, according to data compiled by Refinitiv Lipper. It’s the seventh largest flow into the asset class on record and the biggest since June. The prior week saw a net outflow of $2.2 billion
• The amount of outstanding investment-grade corporate bonds maturing in three years or less shrunk by 7% this year compared with the end of last year, according to Barclays Plc. That decline has come even as the overall corporate bond universe has grown by more than 11%, credit strategists Bradley Rogoff and Shobhit Gupta wrote in a note Friday

Europe

In the secondary market, trading prices for leveraged credit rose last week, fueled by optimism surrounding Pfizer’s vaccine study

• A gauge of credit risk for high-yield European corporates has remained broadly below ~300bps this week, according to data compiled by Bloomberg
• The European Union could issue a new social bond over the next three weeks given a promising spread backdrop, according to Commerzbank

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