curb your enthusiasm

Wanted: Asian Bond Skepticism

Record junk sales sit uncomfortably with expectations of three U.S. rate increases this year.

Asian bond investors could use a healthy dose of skepticism.

Junk-rated dollar debt in the region looks too good to be true. The first quarter hasn't even finished and non-financial corporations ranked below investment grade by Moody's Investors Service or Fitch Ratings have sold a record amount of securities. That's happened even as U.S. Treasury yields enter territory that billionaire bond investor Bill Gross says marks the beginning of a bear market -- and after the Federal Reserve raised rates earlier than analysts originally predicted.

I've already noted the baffling complacency in stocks. Bond markets, particularly for the riskiest paper in Asia, are also showing signs of ignoring the potential risks ahead. The average yield to maturity of securities rated single B, only a couple of steps from the C category that indicates imminent default, remains near the lowest in history, even after climbing 28 basis points in the past two weeks.

Chinese developers have been particularly happy about that, selling a record amount of dollar bonds this quarter. The majority of new issues, especially those from China, have rallied over the past month despite the heavy supply and rising benchmark rates. That's after Asian corporate defaults on U.S. currency debt reached the third-highest amount on record last year.

If all of that doesn't worry you, perhaps another historical fact might. The previous record for high-yield issuance in the region happened in the first quarter of 2013, just before former Fed Chairman Ben Bernanke signaled, on May 22 of that year, that the central bank would start reversing quantitative easing. 

The likelihood of the Fed turning more hawkish has been cast aside after Thursday's remarks by current Chair Janet Yellen, so there may be no repeat of the 2013 taper tantrum. But the expectation of three rate increases this year should be enough to give Asian bond investors pause. If dollar benchmark rates move higher, bond yields also will have to, especially in countries whose currencies are vulnerable to outflows.

Whether Gross will be proved right on his bear market predictions is an open question. But Asian investors clearly need to rein in their optimism.

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

    To contact the editor responsible for this story:
    Matthew Brooker at

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