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Asia Bond Yields Hit Record Lows as Nomura Says Tide to Turn

  • Corporate note yields drop to 3.76%, lowest in data to 1996
  • Nomura says worsening creditworthiness may push up premiums

Borrowing costs for Asian companies have dropped to record lows in the dollar bond market amid a rebound in commodities and China’s property market. Nomura Holdings Inc. says the tide is about to turn.

Average yields on corporate notes from Asian firms have slid 77 basis points this year to 3.76 percent, the lowest in data going back to 1996, according to Bank of America Merrill Lynch indexes. The extra yield over government bonds has declined 36 basis points to 242 basis points. Nomura says that as companies’ creditworthiness may deteriorate in the next six months, the premiums could rise 40 to 50 basis points.

While Chinese home prices rose in the most cities in more than two years in April in a boost for developers, debt defaults by local firms have spread as the economy weakens. Asian commodity firms also haven’t escaped strains despite the Bloomberg Commodity Index jumping more than 20 percent from its January low, with PT Berau Coal Energy proposing to buy back its bonds at 18 cents on the dollar in its debt restructuring.

Worsening Fundamentals

“The rally in the past four months was supported by strong technicals as inflows into emerging-market bond funds rebounded while net supply continued to be low,” said Gaurav Singhal, credit analyst at Nomura in Hong Kong. “We believe rich valuations do not compensate for deteriorating corporate fundamentals, slowing growth and rising defaults in China.”

Companies in Asia excluding Japan have issued the equivalent of $79 billion notes in dollars, yen or euros so far this year, down 20 percent from the same period last year as more Chinese issuers returned home for cheaper funding.

The Federal Reserve’s next interest-rate increase is also a threat for dollar securities in Asia, analyst Annisa Lee said in a separate interview in Singapore. Fed Chair Janet Yellen held off on Monday from specifying any time-frame for a rate increase in a shift from her May 27 stance. Yellen said she expects to raise interest rates gradually.

Nomura cut its view on Asian credit to underweight from neutral on May 30, citing risks tied to the strengthening U.S. dollar, worsening onshore bond default in China, political risks and slowing fund inflows into emerging markets. Dollar bonds sold by Chinese companies dominate the Asian debt market and index weights.

Nomura said its recent discussions with Singapore-based investors suggest fund managers are wary of valuation in Chinese property and technology company bonds and potential sovereign downgrade, while private-banking clients are favoring higher-yielding notes from Indian companies.

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