Asia’s stronger balance sheets and better economic outlook will see the yield premium investors demand to own the region’s debt versus U.S. bonds shrink, Pacific Investment Management Co., manager of the world’s biggest fixed-income fund, predicts.
Sectors to watch include energy, financials and high yield, where corporate issuance since Dec. 31 set a record with 76 new deals totaling more than $30.4 billion, the Newport Beach, California-based fund manager said in its latest Asia Credit Perspectives report, released today. The extra spread investors demand to hold Asia dollar bonds has fallen 25 basis points this month to 333 basis points, Bank of America Merill Lynch indexes show. That compares with a 3 basis-point fall to 152 for debentures from U.S. companies.
“There are many advantages to investing in Asia,” said Raja Mukherji, the Hong Kong-based head of Asian credit research at Pimco, which had $1.97 trillion in assets under management as of June 30. “The region enjoys decent rates of growth which exceed much of the developed world.”
Developing nations in Asia are forecast to expand almost four times faster than developed economies in 2014, according to International Monetary Fund world growth estimates released in July. The last several years have seen some extraordinary growth in Asian credit markets and ongoing trends, including supply and demand dynamics, banking sector deleveraging and increasing demand for energy across the region paint a vivid picture for credit investment opportunities, Pimco said.
Borrowers in Asia outside Japan sold some $93.1 billion of U.S. dollar-denominated bonds this year versus $84.1 billion the same period of 2012, according to data compiled by Bloomberg. Issuance ground to a halt in June after the Federal Reserve signaled it may begin tapering stimulus this year, sending bond yields to a one-year high as funds demanded compensation for the cost of future interest-rate rises.
News last week U.S. policy makers won’t pare their $85 billion-a-month quantitative-easing program before they see more evidence of a sustained economic recovery has sparked an issuance revival with companies including China National Offshore Oil Corp., China General Nuclear Power Holding Corp. and Sri Lanka’s DFCC Bank planning sales.
Woori Bank Co. sold $500 million of 2.875 percent 2018 bonds yesterday while Bangkok Bank Pcl raised $500 million selling similar-maturity 3.3 percent notes, according to data compiled by Bloomberg. U.S. investors bought 28 percent of Woori’s deal, while European accounts took 17 percent, a person familiar with the matter said today.
A lack of U.S. dollar-denominated sovereign supply as countries increasingly prefer to issue debt in their own currencies, investor demand for yield and companies looking outside their traditional banking relationships for financing will ensure bond offerings from the region remain robust, said Pimco, whose $251.1 billion Total Return Fund has fallen about 2.2 percent this year.
“These three factors have opened a huge window for Asian corporate issuers to come to the market for financing,” said Robert Mead, a portfolio manager at Pimco and the report’s co-author. “Korea, including its quasi-sovereign Korea Development Bank, was for many years the single-largest issuer by country in JPMorgan’s Asia Credit index but as of February, China has taken its place, driven by strong corporate issuance. We expect the larger economies in the region, particularly China, India and Indonesia, to continue to increase their presences in the index.”
More companies in China’s retail and consumer sectors may sell bonds in 2014 as personal incomes in the world’s most populous nation rise and urbanization boosts spending, according to Pimco, a unit of Munich-based insurer Allianz SE. And, because refinancing needs across the region are minimal over the next two years, default rates are expected to remain low.
“Many countries across Asia are also improving the quality of their institutional frameworks, regulatory bodies and bankruptcy regimes,” Mead said. “That said, we fully expect to see instances where these frameworks, bodies and regimes will be tested -- challenges which, in turn, may help Asia’s credit markets evolve and develop.”