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Asian Dollar Bond Spreads to Widen in First Quarter: HSBC

Yield premiums on dollar-denominated bonds in Asia may jump in the first three months of 2013 as investors fret about the world economy, said HSBC Holdings Plc. Weekly sales of the notes tumbled to a 10-week low.

“There will be a first-quarter Asian credit market correction on concerns about global growth,” before central bank stimulus spurs a recovery in the following three months, said Hong Kong-based Dilip Shahani, head of global research for the Asia-Pacific region at HSBC. An index of average spreads on dollar bonds “should widen out to 300 basis points by the end of the first quarter.”

The gauge was at 267.9 basis points more than Treasuries on Dec. 13, the HSBC data show. Economic growth in Group of 10 currency nations will slow to 1.2 percent in 2013 as spending cuts spur a recession in Europe, according to strategists surveyed by Bloomberg. While dollar bond sales from Asia outside of Japan dropped 64 percent this week to the least since the five days ending Oct. 5, annual offerings are at a record $121.1 billion, Bloomberg-compiled data show.

Zoomlion Heavy Industry Science & Technology Co., a Chinese concrete and hoisting machinery maker, sold the only bond this week. Zoomlion H.K. SPV Co., a unit of the company, sold $600 million of 10-year bonds at a spread of 456.2 basis points more than Treasuries, according to data compiled by Bloomberg. That compares to the $1.65 billion raised last week by four companies, the data show.

Total Returns

Investors will see a 0.3 percent total return from Asian debt in the U.S. currency in the first quarter of 2013, before a rally in the following three months drives gains to 5.8 percent for the first half, Shahani said. He expects the index for average dollar-bond spreads to narrow by 70 basis points to 230 by the end of the second quarter.

“Whilst the credit markets will be choppy, we would stay invested based on the higher return by the end of the second quarter,” he said. Investors in Asian dollar bonds lost 0.2 percent this month, paring returns this quarter to 1.4 percent, the HSBC gauge shows.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed one basis point to 111 as of 8:52 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The benchmark is set for a drop of 2.8 this week, according to RBS and CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Bond Risk

The Markit iTraxx Australia index advanced one basis point to 124.5 basis points as of 12:02 p.m. in Sydney, according to Westpac Banking Corp. The measure is on course to end the week down 2.1 basis points for its fourth straight week of declines, according to Westpac and data provider CMA.

The Markit iTraxx Japan index was little changed at 165.5 as of 9:52 a.m. in Tokyo, Citigroup Inc. prices show. The gauge is on track to decline 5.5 this week, according to Citigroup and CMA prices.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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