Spurred by a wave of liquidity resulting from the European Central Bank’s long-term refinancing operation (LTRO) and the Bank of Japan’s expanded loan programme, investors have been hungrily snapping up Asian bond deals left, right and centre. But the hunger for yield has led to a bubble which will pop, and a number of signs are already emerging that the peak of the rally could be at hand.
Successful deals from the Development Bank of Mongolia (DBM) and China’s Agile Properties are one indicator. When a debut frontier issuer like DBM – even if it is quasi-sovereign – and a mainland property name offering double-digit yield come to market, the writing appears on the wall more clearly: primary investors have moved well down the credit curve.
Add to that ongoing macro concerns about a potential Chinese hard landing, continuing bouts of uncertainty in Europe and the US, and the increasing supply risk from more and more issuance, as well as a recent dip in Treasury prices.
“I am increasingly concerned that the data coming out of China may spoil the party in the short term,” Dariusz Kowalczyk, senior economist and strategist at Crédit Agricole. “The growth in industrial production was, in terms of month-on-month growth, half of last year's levels which means concerns about a Chinese hard landing could come back into force.”
Value-added industrial output in China grew 11.4% year-on-year in the January-February period, slowing from a 12.8% increase in December, according to the National Bureau of Statistics. Retail sales also grew more slowly: at 14.7% during the two month period year-on-year, as compared to 18.1% in December.
And movements in Treasury yields, as well as that of government debt in Asia, are reflective of the appetite for greater risk.
Ten-year Treasury yields were trading at 2.33% as Asiamoney PLUS went to press. At close on March 12 they were trading at 2.03% and they are now trading at their highest level since they hit 2.4% on October 27 last year.
Other Asian sovereign yields have also risen. Korea’s benchmark 10-year yield was at 3.95% as Asiamoney PLUS went to press, up from 3.8% on February 28. And Thailand’s five-year yield was at 3.6%, as compared to 3.29% on February 27 and 2.98% on January 10.
But, despite being an indicator of risk-on, yields on Treasuries and sovereigns rising also means that credit investors will get lower spreads over safe paper, reducing the risk premium they earn from higher yielding bonds and making them less attractive.
“Rising Treasury yields may limit the positive outlook as people may want to wait for the bottom of [US Treasury] prices to crystallize before committing new funds into credits in a more aggressive way,” said Kowalczyk.
“The lower yielding names will probably take a hit, the higher yielding names probably less so,” said a credit analyst covering high yield. “But when the market goes up to a certain level you will start seeing new supply which will not be supportive to existing bonds and I feel we might be getting to that stage,” she added.
The supply risk from corporates rushing to market to cash in on low primary yields is another risk that threatens the ongoing rally. Supply risk increasing in all sectors affects the secondary market first but also future primary issuance as investors get their fill of exposure to various types of credits and the diversification play becomes less attractive.
And issuers, as well as their arrangers, are increasingly leaving little on the table for investors. As our sister publication Euroweek pointed out, the trend is now firmly for new issue discounts as opposed to new issue premiums.
Singapore’s CapitaMall Trust and Thailand’s Siam Commercial Bank both priced deals at 10 basis points (bp) inside where their outstanding bonds were trading. The former priced a US$400 million six year bond on March 12 at 285bps over Treasuries and the deal was 10 times oversubscribed. The latter priced a US$600 million 5.5 year bond at 252.5bp over Treasuries on March 13.
And, according to IFR Asia, Indonesian property company Alam Sutera Realty is currently marketing a five-year bond which is expected to carry a double-digit coupon. Other Chinese property names are also likely to follow Agile into the market with double-digit yielding deals of their own.
All of this spells doom and shows all the hallmarks of a pop-when-not-if bubble. In the meantime, bankers will continue to jam issuers through at pricing so tight that it makes eyes water. But all investors need is a push to spark a sell-off. That push could come from bearish macro data out of China or the US, an unforeseen logjam in European debt negotiations or even just a poorly executed bond deal.