Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

High-yield bonds have become the world's hottest commodity as investors try to ride the global rally in stock markets. In Asia, however, that could mean dangerous times ahead.

On Monday, Road King Infrastructure Ltd. raised $300 million selling dollar bonds to yield 7.95 percent. Preliminary price talk centered around the 8.625 percent mark but demand was so strong that the Chinese developer managed to knock off almost 70 basis points. Orders exceeded $5.5 billion, more than 18 times the amount of notes on offer, even though Moody's rates Road King B1, four notches below investment grade.

It may sound surprising, but that's been the norm this year. According to Goldman Sachs Group Inc., investors have put in for 6.5 times the amount of high-yield bonds on offer, more than twice as much for investment-grade securities. That love of junk has pushed the average premium that speculative-grade notes pay over Treasuries to the lowest in at least seven years.

Keep the Faith
The average premium junk-rated dollar bonds in Asia pay over U.S. Treasuries has dropped to the lowest in at least seven years
Source: Blomberg

In portfolio managers' defense, global volatility has been relatively subdued. The Chicago Board Options Exchange Volatility Index, or fear index, is only a fraction higher than the 30-month low it touched in January. That may be misguided comfort, considering the chance for things to go wrong is actually quite high, as I have argued before.

The biggest driver -- and biggest risk -- is China. More than a third of the $97 billion of corporate junk debt outstanding in Asia, excluding Japan and Australia, comes from the world's second-largest economy. If Hong Kong is added, that figure increases to almost half.

Panda in the Room
Hong Kong and China comprise 49 percent of outstanding junk corporate bonds in Asia
Source: Bloomberg
* Data excludes Japan, Australia and New Zealand.

So high-yield bond money managers are buried in high-risk China debt up to their necks. It's akin to taking a directional bet -- gambling everything on a market moving either up or down.

That shouldn't be a problem until later this year, when the 19th National Congress of the Communist Party of China will be held in Beijing. Prior to that, the nation's economic and financial markets should be reasonably well behaved. Any substantial change in regulations or other significant outcome could spell pain for international investors.

For now, it seems like the global rally in stocks is making people complacent. Such a big binary event should prompt investors to hedge. If they don't, it's a recipe for trouble.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net