BNP Says Investors Need to Pay More Attention to Asia Bond Risks

  • Low interest rates for extended time build up risks: Chang
  • Yield premium on Asia dollar bonds near lowest since 2007

BNP Paribas SA warns that investors aren’t paying sufficient attention to default risks in Asia’s dollar bond market as they hunt yields.

“The liquidity that is chasing Asian dollar bonds is pushing yield levels down and eroding credit differentiation,” said Charles Chang, head of Asia credit strategy and sector specialists at the firm in Hong Kong. “We are advising investors to be cautious and not just jump in and chase bonds with everyone else.”

Global central banks have kept benchmark interest rates near zero amid weakening economic growth, prompting flows into riskier investments offering higher yields. Traders see only 20 percent odds of a rate increase by the Federal Reserve Wednesday. The Bank of Japan has been studying the effectiveness of its stimulus programs and economists are split over the likelihood of further easing at the conclusion of a meeting the same day.

The unprecedented monetary easing around the world has helped drive down the yield premium on dollar bonds from Asian issuers 72 basis points this year to 206 basis points, near the lowest since 2007, before the global financial crisis, according to Bank of America Merrill Lynch indexes. The flow of money into the region has come even as the number of rating cuts has outpaced upgrades.

Ratings Cut

Moody’s Investors Service has downgraded 36 Asian high-yield issuers in 2016 and upgraded three, according to a report on Sept. 7. In August alone, the rating company downgraded six high-yield issuers and upgraded one.

“If you have very low interest rates for an extended period of time, this builds up risks,” said Chang at BNP Paribas. “Many emerging market investors have funds to put to work, and even those who feel that bonds are expensive feel compelled to buy in the market.”

Chang highlighted issuance linked to Chinese local governments as having weaker metrics.

“Many of these local government financing vehicle bonds are coming at pretty tight levels” in terms of yield premiums, he said. “If you are seeing weak issuers issuing too much debt too cheaply, they could have problems servicing these debts further down the road.”

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