BlackRock Cautious as Sales End Dollar Bond Rally: China Credit

Chinese dollar-denominated bonds lost money for the first month since May as record issuance by developers prompted caution at funds including BlackRock Inc.

The securities lost 0.7 percent as of Jan. 31, according to JPMorgan Chase & Co. indexes. The yield on 2020 notes sold by Shimao Property Holdings Ltd., whose projects include the five-star Le Royal Meridien Shanghai hotel, has jumped 56 basis points to 7.18 percent since being issued earlier last month. Real estate bonds globally yield 2.95 percent, according to Bank of America Merrill Lynch indexes.

“There has been an avalanche of new deals so there is definitely some investor fatigue,” said Suanjin Tan, a Singapore-based fixed-income portfolio manager at BlackRock, which had $3.79 trillion of assets under management as of Dec. 31. “People are a little bit more bullish than I would be because the home-price restrictions continue to be in effect in China and China’s economy is slowing, so you have to be very careful where you pick your spots.”

China’s government is easing curbs on the industry to spur economic growth without fueling real-estate speculation. The record $6.95 billion of sales by property companies last month included only one investment-grade issuer. Hopson Development Holdings Ltd., a Beijing-based developer, sold five-year bonds rated CCC+ by Standard & Poor’s, seven steps below investment rank.

Rising Yields

Yields on $750 million of 2023 bonds sold by Country Garden Holdings Co., a developer based in Guangdong, rose 17 basis points to 7.26 percent from Jan. 8, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Yields on the $500 million of debt sold Jan. 3 by Kaisa Group Holdings Ltd., which is based in Shenzhen, have risen 72 basis points to 9.95 percent since Jan. 8, according to Trace.

Borrowing costs rose after companies increased offerings to take advantage of the lowest Asian yield premiums in 20 months. The extra yield on securities in the U.S. currency in the region over Treasuries slid to 245 basis points on Jan. 7, the lowest level since May 2011, and was at 255 basis points as of Jan. 30, according to JPMorgan indexes.

Central China Real Estate Ltd. was among businesses seeking to lock in the cheaper funds, even as the surge in sales triggered yield rises in the secondary market. The developer of residential property in Henan province sold $200 million of notes last month at 8 percent, down from the 12.3 percent it paid when it last sold dollar debt in 2010, according to data compiled by Bloomberg. The bond was rated B+ by Standard & Poor’s, four steps below investment-grade status.

‘Great Opportunity’

“The issuer understands that these yields are a great opportunity for them,” Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd., said in reference to Chinese borrowers.

Companies are trying to secure the cheaper funding costs before any further rises in U.S. Treasury yields push up the rates they pay to sell dollar debt in Asia. The U.S. government securities were headed for their steepest monthly loss in two years.

“If U.S. Treasuries are going to start offering more decent yields again you are going to really question why you own a Chinese high-yield property bond,” Gallimore said.

Economic Pickup

The world’s second-biggest economy accelerated for the first time in two years last quarter, fueling speculation for a further rebound in the property market, and buoying appetite for riskier assets and the country’s currency. Gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period. December data showed prices for new residences rose in 54 of the 70 cities the government tracks, the most in 20 months.

“I think there has been a big mindset shift from this point last year to now where the fear of a huge property market collapse in China has pretty much gone away,” BlackRock’s Tan said. “The risks are still there in my opinion but very few people believe a potential doomsday or catastrophic scenario caused by ‘ghost cities’ will happen in the near future.”

China’s benchmark 10-year government bond yield climbed to 3.61 percent on Jan. 30 from as low as 3.24 percent on July 11.

The yuan fell 0.08 percent today to 6.2240 per dollar as of 2:34 p.m. in Shanghai, prices from the China Foreign Exchange Trade System show. The currency rose 0.19 percent last month and touched a 19-year high at 6.2124 on Jan. 14.

‘More Rational’

The cost of insuring China’s debt against non-payment with credit-default swaps has risen six basis points this week to 69, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. It is down from as high as 146 in June last year. The indexes typically fall as investor confidence improves and rise as it deteriorates.

The volume of residential property sales in China will rise this year driven by improved funding availability to developers, Fitch Ratings said in a Jan. 29 research report. The country’s new government may introduce fresh curbs on the property market when it takes power in March, David Cui, equity strategist at Bank of America Corp., said last month.

In its almost three-year effort to tighten the property market, the government has raised down-payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing, and enacted home-purchase restrictions in about 40 cities.

Hopson Development’s five-year bonds were priced to yield 9.875 percent, according to data compiled by Bloomberg. The yield on the notes has leapt 52 basis since being issued to 10.4 percent, according to Royal Bank of Scotland Group Plc prices.

“Demand is getting a little bit more rational and because there’s so much supply, investors are thinking maybe they can afford to wait for the next one and not invest in every single issue,” BlackRock’s Tan said.

— With assistance by Henry Sanderson

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