Hang In There
The U.S. junk bond rout has rattled investors in Asian speculative-grade debt too, but for money managers in this part of the world, bad news is business as usual. While nobody is suggesting a rush into Asian non-investment-grade notes, selling out wouldn't be the smart thing to do, either.
Following the surprising news last week that Third Avenue had shut the gate on redemptions in one of its funds, Asian dollar junk-bond yields surged to the highest in more than two months. Rates have climbed 13 basis points this week to 8.03 percent, a level last seen in early October, JPMorgan Chase indexes show.
But investors, especially those in Chinese property bonds, have reason to stay the course.
Developers from China are an important part of the dollar bond market in Asia. Of the $302.9 billion of U.S. currency notes that have been sold in the region outside Japan since the beginning of last year, some $28.7 billion, or almost 10 percent, have been from real estate companies in the world's second-largest economy. About $3.7 billion of those notes have been sold since June 30, versus $5.2 billion the first six months of the year, during Kaisa's landmark default. The latest offering was priced just last week, when Hydoo raised $100 million selling three-year debentures at 13.75 percent. Other Chinese developers that issued debut dollar bonds in 2015 include Golden Wheel Tiandi, TusPark Holdings and Beijing Properties, so demand is certainly there.
Moreover, Chinese developer bonds have been a rare outperformer in a sea of global doom:
The recent slowdown in issuance doesn't necessarily mean developers are borrowing less. Sales of yuan bonds have taken off after authorities allowed more real estate companies to tap the domestic market. Homebuilders have issued a record 382.4 billion yuan ($59.2 billion) of notes this year, compared with 117.1 billion yuan in all of 2014, according to data compiled by Bloomberg. China loosened mortgage policies and down-payment requirements for some home buyers at the end of March, adding to easing measures to aid an industry that represents about one-third of the economy.
There's a risk that the fizzling junk bond rally in the U.S. feeds through to mass redemptions in high-yield bond funds globally. Asia has weathered these dips before, however. Kaisa's missed payment as seen in the rear-view mirror resembles a small speed bump. Issuance continued largely unbroken and within months, junk yields had dropped back to one-year lows. Goldman Sachs made nine Asian junk bond picks in May, and the one that really came good was Chinese property developers.
Sure, traders are pricing in a 76 percent chance the Fed will pull the trigger on a rate increase this session, and an increase would raise Chinese homebuilders' debt-servicing costs. But until there are more defaults or other concrete signs of decay, history would suggest there's no reason to rush for the exit.
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