As Junk Bonds Sell Off, Eyes Turn to Asia’s $106 Billion Market

The gravity-defying rally in Asia’s $106 billion junk bond market could start to sputter, as concerns mount about speculative debt globally.

“We absolutely do have concerns over Asia junk bonds,” said Owen Gallimore, Singapore-based head of credit strategy at Australia & New Zealand Banking Group Ltd. “We are underweight Asia high yield as valuations look frothy.”

Gallimore’s concerns hinge on the surge in junk bond supply, particularly from China’s riskiest firms. Borrowers from Asia excluding Japan sold a record $47.4 billion in dollars, euro and yen this year, more than triple the amount in 2016, according to Bloomberg-compiled data. China made up 64.4 percent of those sales.

From New York to Shanghai, concerns about the the global junk bond market have started to drag down prices -- part of a broader retreat that’s also affected investment-grade securities. Exchange-traded funds that buy high-yield debt have plunged the most since August.

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Asia has in recent years been insulated from global jitters as many Chinese investors prefer to buy and hold. But there are signs of some selling, as the premium on dollar junk notes in Asia has increased 13 basis points in the last two weeks, according to a Bloomberg Barclays index. 

“Asia high-yield issuance continues to rocket higher with expensive onshore China funding,” said Gallimore. “The supply is an important part of the weakness.”

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