It might be unwelcome to many, but much like the pullback in US and European high yield, the recent carnage in Asian bond markets might provide a medicinal dose of sanity. Asian bond issuers have been addicted to quantitative easing for too long, and the chase for yield had blinded investors to the point where even some bankers were questioning whether the market was overdosing on cash.
The markets knew that quantitative easing would have to come to an end sometime. But those concerns were pushed to the back of people’s minds as bankers were busy printing investment and speculative grade names at super-tight spreads. Such was the (over)confidence that Hopson Development Holdings even managed to complete the region’s first CCC-rated bond in January.
At this rate, surely the markets were going to surpass last year’s $130bn record, said bankers.
There was a slight wobble towards the end of Q1, when a bunch of corporates came out and printed perpetuals with meagre step-ups. But these deals were still being chased by investors, regardless of whether they fully understood them or not.
Bankers were losing sleep to crank out deals, some of which had questionable fundamentals and shaky finances. But they still sold like hot cakes thanks to institutional investors and private banks who say they sometimes did not have enough time to comb through details — but still jumped in.
Well, the day of reckoning has arrived — and earlier than some expected. Bond investors are now licking their wounds after the implosion in secondary spreads and issuers are flabbergasted that they may have to pay as much as 60bp more, now that the Fed has indicated that may, little by little, put the brakes on quantitative easing.
But that is no bad thing. Once prices stabilise, markets will be weaned off their unhealthy cravings and be able to start with a clean slate.
Investors will be inclined to take much more time to discern the viability of a business and its durability in difficult markets, especially as an eventual end to US monetary easing and Basel III reforms could weaken the ability of Asian companies to raise funding.
A reconfiguration of pricing expectations could also stop companies demanding excessively low coupons from their bankers, which will not only restore some stability to secondary performance but also clear the need to try to sell bonds to investors at any cost.
But the healthiest part of this detox might be the fact that companies with unconvincing business models, and that are highly leveraged or reliant on unstable sources of financing will find it much more difficult to receive support from quality investors, even if they offer juicy spreads.
In theory, markets should become more level-headed and resilient to subsequent market shocks. Whatever happens, it looks like sober days ahead.