China Stimulus Talks Fuel Rebound in $311 Billion High-Yield Dollar Bond Market

China’s dollar junk bond market is catching a break after months of pressure, as authorities mull a broad package of stimulus measures to boost the economy.

The securities have risen in consecutive weeks for the first time since early February, according to a Bloomberg index. The developer-dominated market has returned 3.8% so far in June, with average prices rising to about 71 cents — just above a level widely considered as a threshold for distress.

That’s a turnaround after four months of losses fueled by renewed economic and home-sale sluggishness as the boost from the end of China’s Covid Zero policy faded. The rebound comes after stress in China’s offshore market rose to level 4 in May from 3, Bloomberg’s China Credit Tracker shows. The gauge indicates rising levels of financial strain via a band from 1 to 6. Last month’s reading was impacted by junk bonds losing 6.2%. That was the most since a rout in October.

The market was pressured in May by yet-another builder’s default, a Hong Kong court handing down liquidation orders for unpaid debt and heightened concerns about conglomerate Dalian Wanda Group Co., one of China’s few high-yield dollar note issuers this year.

Regulators have been working on a new basket of measures to support the property sector, Bloomberg News reported earlier this month. That support is a key part of a broader package of economic stimulus under consideration. On Tuesday, China’s central bank unexpectedly cut a series of short-term interest rates. It ramped up monetary stimulus further on Thursday by lowering the rate on one-year loans, the first reduction since August, amid weakening economic activity.

Some investors say the market needs broad policy steps to sustain its rebound.

“There is expectation that any policy support is likely to be implemented at a targeted, city level as opposed to something which will be across the board,” Clement Chong, head of credit research at Eastspring Investments Singapore Ltd., said about real estate sector. “In the absence of any strong, meaningful measures I really find it hard to see stronger momentum in Chinese property bonds.”

In the onshore credit market, stress remained at level 3 in May, according to Bloomberg’s tracker. There has been renewed focus on domestic debt risks after a local-government financing vehicle narrowly dodged default last month on a yuan bond with a late-minute payment.

For their part, money managers have been betting that LGFVs, which fund infrastructure development, will benefit from government focus on stabilizing economic growth. Their notes have been faring well. Spreads between such yuan-denominated bonds and similar-maturity sovereign debt have narrowed as much as 73 basis points so far this year.

Meanwhile, Chinese regulators are considering promoting the development of the domestic high-yield bond market, according to people familiar with the matter. That signals support for riskier borrowers having expanded financing channels.