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Libor Bites as Asia Dollar Bonds See Worst Start Since 1997

Libor Fuels Pain as Asia Dollar Bonds See Worst Start Since 1997

(Bloomberg) -- Asian dollar bonds handed investors the worst first-quarter returns in two decades in 2018, as rising short-term interest rates cause some investors to unwind bets.

Dollar-denominated notes in Asia ex-Japan lost 1.3 percent in the three months through March 31, according to an ICE BofAML index, the biggest decline for the gauge since its inception in late 1996. The three-month London inter-bank offered rate reached 2.32 percent this week, following a 62-basis point advance in the first quarter.

Some investors using leverage to buy the bonds “have been unwinding their positions because higher borrowing costs and relatively tight spreads made their investments no longer economic,” said Paul Lukaszewski, head of Asian corporate debt and emerging market credit research at Aberdeen Standard Investments Ltd. in Singapore.

Libor Bites as Asia Dollar Bonds See Worst Start Since 1997

Asia dollar bond issuance in the region declined about 37 percent in March on year, as volatility in underlying interest rates made investors more picky about credits, causing a handful of weaker issuers to put off deals. Bond investors should expect more volatility as dealers and hedge funds may hold notes for shorter periods given the higher funding costs, said Leong Wai Hoong, a senior portfolio manager for Asian fixed income at Nikko Asset Management.

Private banks in Asia, which engage in leveraged purchases for clients, have been less active recently, according to Leong. Banks are also buying fewer bonds as the loans’ business becomes more lucrative with Libor rising, he said.

Libor Bites as Asia Dollar Bonds See Worst Start Since 1997

The weakening bid from leveraged structures will contribute to softening demand for dollar bonds issued by Chinese corporates, which dominate Asian bond market issuance, according to Aberdeen Standard’s Lukaszewski.

To contact the reporters on this story: Lianting Tu in Hong Kong at ltu4@bloomberg.net, David Yong in Singapore at dyong@bloomberg.net.

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Finbarr Flynn, Chan Tien Hin

©2018 Bloomberg L.P.