Goldman Sees Chance to Cut Its China Junk Debt Holdings

Goldman Sachs Group Inc. says now may be a good time to cut holdings of Chinese high-yield bonds after the longest winning streak in six weeks.

“Investors should use the recent rally to reduce overweight positions,” analysts led by Hong Kong-based Kenneth Ho wrote in a note dated April 4. “We believe that there will be more headlines noises to come out of China and expect to see further credit differentiation.”

Dollar-denominated junk bonds from the nation gained 0.95 percent in the seven days through April 4 for the second straight weekly advance, according to Bank of America Merrill Lynch indexes. While recent improvement in emerging-market sentiment and China’s announcement of stimulus last week fueled the rally, better-quality issuers remain Goldman’s preferred bet amid continued concern about the world’s second-biggest economy, according to the note.

China unveiled a package of measures to support the economy including railway investment and tax breaks last week, as the government seeks to bolster slowing growth. Exports likely rose 4.9 percent in March from a year earlier, according to the median estimate of 37 analysts surveyed by Bloomberg News before trade data this week, after the biggest drop since 2009 in February. Manufacturing contracted a third month in March, an HSBC Holdings Plc and Markit Economics gauge showed last week.

Sinopec Sells

China Petrochemical Corp., known as Sinopec Group and parent of Asia’s largest oil refiner, sold $5 billion of bonds on April 2, the biggest dollar-denominated sale by an Asian issuer in a decade, data compiled by Bloomberg show. China Citic Bank International Ltd. meets investors from today about a possible offering of notes in the U.S. currency, a person familiar with the matter said last week.

“We expect China issuance to increase and to catch up in the remaining quarters, especially given the improvement in market sentiment in recent weeks,” wrote Ho. Offerings from the nation slumped to $12.7 billion in the first three months of the year, from $15.1 billion during the same period last year, according to Goldman data.

Sri Lanka plans to sell as much as $500 million of notes as soon as today, a person familiar with the matter said. The sovereign is marketing five-year bonds at about 5.5 percent, the person said, asking not to be identified because the terms aren’t set.

Pakistan plans to price five- and 10-year dollar-denominated debt as soon as tomorrow, a separate person said. Bangladesh’s Banglalink Digital Communications Ltd. is considering a $300 million offering of five-year securities, Moody’s Investors Service wrote in an e-mailed note today.

The cost of insuring Asian corporate and sovereign bonds from default was little changed today, according to traders of credit-default swaps.

Asia Risk

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan was little changed at 124 basis points as of 8:08 a.m. in Hong Kong, Australia & New Zealand Banking Group Ltd. prices show. The benchmark is holding at its lowest level since April 2, when it touched a six-month low, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Australia index slipped 0.5 basis point to 97.5 basis points as of 9:35 a.m. in Sydney, according to Westpac Banking Corp. The gauge is on course for its lowest close since April 2, according to data provider CMA.

The Markit iTraxx Japan index was little changed at 83.5 basis points as of 8:40 a.m. in Tokyo, Citigroup Inc. prices show.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.