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Chinese Dollar Bond Investors Demand Higher Yields After Default

Investors are demanding the highest premium to hold Chinese dollar notes in almost seven months as the collapse of a developer and the first onshore bond default fuel speculation missed payments will spread.

Yield premiums on securities in the U.S. currency rose to 384 basis points on March 17, the highest since Aug. 30, and held near that level at 382 basis points yesterday, JPMorgan Chase & Co. indexes show. Indian state-owned IDBI Bank Ltd. is offering 5.5-year securities at a spread of about 370 basis points, according to a person familiar with the matter.

Stocks and bonds of some Chinese developers have slumped after government officials said Zhejiang Xingrun Real Estate Co. collapsed with 3.5 billion yuan ($565 million) of debt. That added to nonpayment concerns after Shanghai Chaori Energy Science & Technology Co. became the first onshore issuer to default two weeks ago and Premier Li Keqiang said such outcomes may sometimes be unavoidable.

“This is merely one example of many distressed small developers in China,” Bei Fu, a credit analyst at Standard & Poor’s, wrote in a March 18 report. “The companies have been struggling daily for survival.”

Real estate companies account for about 60 percent of dollar bond offerings from Chinese borrowers this year, according to data compiled by Bloomberg.

Record Yields

Shares of China Vanke Co. and Poly Real Estate Group Co., the nation’s biggest developers, slumped more than 2 percent yesterday and extended losses today, down 1.3 percent and 1.6 percent respectively. The yield on Evergrande Real Estate Group Ltd.’s 8.75 percent dollar notes due 2018 rose 39 basis points yesterday to 10.847 percent, the most on record.

The last sale in the U.S. currency by any Chinese borrower was China Resources Land Ltd.’s issue of an additional $50 million of 2019 notes on March 13.

The Markit iTraxx Japan index declined 1 basis point to 77.5 basis points as of 9:26 a.m. in Tokyo, Citigroup Inc. prices show. The measure was last lower on March 12, according to data provider CMA.

The Markit iTraxx Asia index was little changed at 128 basis points as of 8:28 a.m. in Hong Kong, Australia & New Zealand Banking Group Ltd. prices show. The measure has fallen from a two-week high of 134.5 on March 14, according to data from CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Australia gauge was also little changed at 102 as of 11:26 a.m. in Sydney, according to National Australia Bank Ltd. The benchmark closed at 106.7 basis points on March 14, the highest since Feb. 5, CMA data show.

Credit-default swap indexes are benchmarks for insuring 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.

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