Fidelity Sees Bargains as 98% of Asia Bonds Sink: Credit Markets
The worst corporate-bond rout since the credit crisis left 98 percent of Asia’s dollar-denominated bonds sold last quarter at a discount, a sign to Fidelity Worldwide Investment it’s time to buy.
A total of 60 bonds issued by borrowers from China to India and Indonesia in the past three months are now trading below their sale price, with six of the 10 biggest declines coming from investment-grade companies that sold longer-dated notes. China Petroleum & Chemical Corp., Asia’s largest refiner, led the retreat as the $500 million of 30-year bonds it issued in April fell almost 16 cents on the dollar through June 30, according to data compiled by Bloomberg.
While speculation the Federal Reserve will start paring its unprecedented bond buying and China’s clampdown on its shadow banking system triggered a global selloff that pushed borrowing costs in Asia to a 12-month high, the exodus is now giving debt investors a chance to scoop up bargains, according to Fidelity’s Bryan Collins. The extra yield investment-grade bonds from Asian companies offer over U.S. Treasuries rose to 2.34 percentage points on June 26, the most since September, according to Bank of America Merrill Lynch.
“Spreads are actually quite attractive, especially for some of the higher quality names where you can be very comfortable about the credit and the stability of the business,” Collins, a Hong Kong-based money manager at Fidelity, which oversees $248 billion, said in a telephone interview. “It does absolutely present a buying opportunity” for investors who can protect against rising yields, he said.
Fidelity is adding to its Asian debt funds some high-quality bonds that are less sensitive to the economy, Collins said. Looking in the medium to longer term, A rated and AA rated large companies that are systemically important and related to state-owned enterprises are attractive at current spreads, according to Collins.
Cnooc Ltd., China’s biggest offshore oil explorer and graded AA- by Standard & Poor’s, had the third-biggest losses last quarter with its 30-year bonds. Debentures sold by Sinochem Corp. and Golden Eagle Retail Group Ltd. were also among the 10 worst performers, Bloomberg prices show.
Globally, corporate and high-yield debt lost 2.2 percent in the second quarter, the most since the third quarter of 2008, Bank of America Merrill Lynch indexes show. Corporate debt from Asian emerging markets lost 4.1 percent while investment-grade debt from the region retreated 4.4 percent, both the most in 4 1/2-years, the indexes show.
Fed Chairman Ben S. Bernanke roiled markets last month when he said the central bank may taper its unprecedented stimulus this year and halt bond purchases around mid-2014, so long as the U.S. economy performs as forecast. Yields on 10-year Treasuries climbed, ranging between 2.08 percent and 2.61 percent last month, according to Bloomberg Indexes.
Some $60 billion has been pulled from U.S. bond funds since then as investors, who fled volatile stock markets to pour about $1 trillion into fixed-income securities since the beginning of 2009, reversed that pattern in anticipation of rising rates.
“After this correction, valuations look less tight and a bit more attractive,” said Luc Froehlich, a Hong Kong-based portfolio manager in Manulife Asset Management’s Asia fixed-income team, which oversees more than $44 billion. “But it’s really hard to nail down the best moment to pick up those bonds. I still see some potential headwinds from fund flows out of emerging markets.”
Elsewhere in the credit markets, the cost of insuring corporate bonds against losses fell in Europe this week.
The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies dropped 6.5 basis points to 112.6, the lowest since June 19, as of 3:43 p.m. in London yesterday. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed 8.9 basis points in the period to 161.3 basis points in Hong Kong.
The indexes typically rise as investor confidence deteriorates and fall as it improves. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Investment-grade bonds, which were little changed this week, have decreased 4.15 percent this year, according to the Bloomberg Global Investment Grade Corporate Bond Index (BCOR) as of July 3.
Sinochem’s $600 million of 5 percent notes sold in April at par were trading at 88.77 cents on the dollar to yield 6.21 percent as of July 4, Bloomberg-compiled prices show. Cnooc’s 4.25 percent of $500 million securities, sold at 98.515 cents on the dollar, were trading at 84.38 cents and yielding 5.29 percent.
“Fundamentals haven’t changed over the last six weeks but perceptions and risk appetites have,” said Suanjin Tan, a Singapore-based Asia fixed-income portfolio manager at BlackRock Inc. “The upheavals we’ve seen over the last few weeks have created certain dislocations in the market, and have provided opportunities we can take advantage of both in a relative value as well as an absolute sense.”
Investors pulled a record $23.3 billion from global bond funds in the week ending June 26, with outflows from emerging markets jumping to an all-time high, according to EPFR Global.
Investment-grade bonds in India and China are however performing better than Russian or Brazilian debt this month, Bank of America Merrill Lynch indexes show, returning 0.33 percent and 0.31 percent respectively.
The cost of insuring Asian investment-grade sovereign and corporate bonds from non-payment fell for the first time in seven weeks in the period to June 28, ending the longest streak of increases since July 2008, according to data provider CMA.
Perceptions of Export-Import Bank of China’s creditworthiness improved most, with credit-default swaps on the AA- rated lender falling 36.5 basis points, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market.
Bank of China Ltd. and China Development Bank Corp. were the second and third best performers respectively.
“The investment-grade market will snap back,” according to Murlidhar Maiya, the head of debt capital markets for Asia ex-Japan at JPMorgan Chase & Co. in Hong Kong. “It’s very hard to nuance these corrections. You overshoot in both directions and that’s why we’ve seen this sell off.”
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