Risk Premiums on Asia Dollar Bonds Keep Dropping Despite Virus

(Bloomberg) --

Asia may be at the epicenter of the coronavirus epidemic, but investors are betting that policy support will help many debt issuers in the region overcome the fallout.

China is leading governments in pledging extra fiscal stimulus to counter the economic hit, and speculation has spread that central banks will also take more steps.

That’s pushed spreads on Asian securities in the U.S. currency down the most in a year over the last two weeks, undoing most of the widening in the second half of January when virus fears flared, a Bloomberg Barclays index shows.

Goldman Sachs Group Inc. expects defaults of high-yield Chinese issuers, which make up a large chunk of the Asian dollar bond market, to slow in the near term as policymakers adopt a “forbearance mode.”

A drop in dollar interest rates is helping by spurring demand for higher-paying credit, which is translating into lowering borrowing costs for issuers in the U.S. and Asia.

“There is still a lot of demand for the Asia asset class, given where yields are and given the fundamental underlying strength,” said Ross Dilkes, Singapore-based portfolio manager for pan-Asia fixed income at UBS Asset Management. “Near term obviously there is lots of uncertainty, but I think broadly people will continue to look favorably at this region, particularly the high-yield space.”

The reversal in market performance has been swift after yield premiums pushed out in the last week of January by the most in five years.

Chinese delivery firm SF Holding Co., which transports everything from food to drugs, got orders in excess of eight times for the $700 million note it sold last week. Demand for Asian dollar bonds in the first two weeks of February stayed over 5.5 times, a similar level to January, and higher than for any month from April to December.

Of course, the coronavirus also presents challenges for many businesses that have seen sales slump and supply chains crimped.

Some investors are ignoring default risks and ever lower recovery rates for bondholders, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. He expects spreads for Asian investment-grade dollar securities to tighten in 2020, but is less sanguine on high yield given default risks.

A surge in offerings in recent days also indicates that the market has gotten back on track after a lull amid the Lunar New Year holidays and the sell-off last month.

Sales in Asian dollar bonds year-to-date are running at a record.

“Financial markets are involved in a tug-of-war between very strong technicals -- ample liquidity, with the prospect of more to come -- and fundamental concerns arising from the coronavirus outbreak,” said Mark Reade, Hong Kong-based head of fixed-income research at Mizuho Securities Asia. “Right now, the strong technicals are winning easily, with risk asset valuations going from strength-to-strength.”

--With assistance from Adrian Yim.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net;Denise Wee in Hong Kong at dwee10@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Beth Thomas

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