The gap between spreads on Asia’s lowest investment-grade bonds and its top high-yield notes widened to the most in a year, signaling junk debt may rally after investors dumped it amid Europe’s fiscal crisis.
The difference between bonds ranked at least Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s and those one grade lower at Ba1 or BB+ climbed to 2.8 percentage points after rising to as much as 3.15 percentage points last month, Bank of America Merrill Lynch data show. That’s almost five times the 0.61 percentage point gap of June 2009 and 1.1 percentage points above the one-year average.
“If you can take a long-term view the high-yield space looks pretty attractive,” Gregor Carle, Fidelity International Ltd.’s fixed-income investment director, said in an interview in Hong Kong. “Without a doubt there are opportunities to be found in the gap between investment-grade and high-yield.”
Concern about contagion from Greece’s fiscal crisis triggered five weeks of withdrawals from global speculative- grade bond funds through June 9, according to EPFR Global, even as Moody’s forecast corporate defaults will plunge amid a global economic recovery. Investors withdrew $6.37 billion from junk bond funds until the week ending June 16, when money managers won back a net $164 million, according to EPFR, which tracks global capital flows.
Companies with the highest junk ratings are fundamentally the same as they were before Greece roiled markets and so their debt is undervalued, said Carle, who helps oversee $752 million in Fidelity International’s Asian High-Yield Fund.
“If you’re an investor that can switch freely between investment-grade and high-yield corporates, now is a good time to switch out of lower-rated investment-grade into the higher- rated high-yield,” Viktor Hjort, a Hong Kong-based credit strategist at Morgan Stanley, said in a phone interview. The compensation for the additional risk is “substantial,” he said.
The Asia-Pacific region’s corporate default rate will “drop sharply” to 3.5 percent this year from 17 percent in 2009 as the region’s economies and credit markets strengthen, Moody’s said on June 13.
“The bulk of defaults are behind us already, so in the medium to long run high-yield is an attractive asset class,” Brayan Lai, a credit analyst at Credit Agricole CIB in Hong Kong, said in an interview. “Will the spread between BBB and BB credits narrow again? Yes, it definitely will.”