Asian junk bonds are underperforming investment-grade peers for the longest streak since 2011, amid a jump in speculative-rated issuance to lock in lower dollar borrowing costs.
High-yield notes in the U.S. currency gained 1.4 percent last month, less than the 1.5 percent returned by debt rated the equivalent of BBB- or above by Standard & Poor’s, according to JPMorgan Chase & Co. indexes. Sub-investment grade securities haven’t returned less than top-grade bonds for two consecutive months since the period through September 2011, the indexes show. Bank of Tokyo-Mitsubishi UFJ Ltd., rated A+ by S&P, plans to sell dollar notes, a person familiar with the matter said.
Guangzhou R&F Properties Co., a Chinese property developer, led $5.5 billion of high-yield sales by Asian corporates this year, up 16 percent from the fourth quarter, data compiled by Bloomberg show. Yields on 10-year U.S. Treasuries, the benchmark for most Asian dollar bonds of that tenor, slipped 42 basis points this year to 2.61 percent as of 10:45 a.m. in Hong Kong.
“Amid fears of rising U.S. Treasury yields, many Asian investors entered 2014 underweight investment-grade bonds as these are seen as most vulnerable to rising rates,” said Mark Reade, a Hong Kong-based desk analyst at Mizuho Securities Asia Ltd. “With Treasury yields grinding tighter year-to-date, these bonds have outperformed.”
Bank of Tokyo-Mitsubishi plans to sell three-, five- and 10-year notes as soon as today, the person with knowledge of the details said, asking not to be identified because the terms aren’t set.
The underperformance in Asian high-yield securities comes as borrowing difficulties in China prompt companies to tap the international bond market, raising concerns about oversupply. The China Banking Regulatory Commission will “strictly control” lending risks to developers in 2014, according to a report posted on the regulator’s website Feb. 28.
“Tight onshore liquidity conditions and the resulting deluge of dollar supply from Chinese developers has contributed to high yield’s underperformance,” Reade said.
The cost of insuring Asia-Pacific corporate and sovereign bonds from default climbed, according to traders of credit-default swaps.
The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan added 1 basis point to 137 basis points as of 8:34 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The gauge is set for a second consecutive day of increases after gaining the most since Feb. 13 yesterday, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The Markit iTraxx Australia index increased 0.3 basis point to 103.8 basis points as of 11:33 a.m. in Sydney, according to Citigroup Inc. The index is rising for a third consecutive day, according to data provider CMA.
The Markit iTraxx Japan index was little changed at 80 as of 9:35 a.m. in Tokyo, Citigroup prices show.
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.