Risks closer to home pose 'bigger threat' to Asia bonds
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Risks closer to home pose 'bigger threat' to Asia bonds


Asia ex-Japan’s bond market has not avoided the shockwaves from the Greek crisis, with debt issuance grinding to a halt this week. But while most attention is on Athens, market observers in Asia said that the real threat is closer to home, writes Narae Kim.

Uncertainty over Greece has left the Asian ex-Japan bond market reeling since late June and as GlobalCapital Asia went to press on Thursday night there had not been a single dollar bond issue this week.

This was an unexpectedly slow end to busy first half when borrowers raised $167.5bn from 288 deals in G3 and offshore renminbi debt, according to Dealogic. This is up from $163.8bn from 317 deals in the same period last year.

However, Asia market observers struck a positive note, saying that contagion from the Greek saga would be temporary at worst, with expectations that the Asian bond market would return to normal as early as the next week.

“Problems surrounding that country have been in the news for years and we already had similar problems with Cyprus in 2013, and given Greece is such a small country in the eurozone in terms of GDP, the impact, even if it officially declares a default, is unlikely to be systematic or long-lasting,” said a fund manager in Hong Kong.

That nonchalance was reflected in secondary trading. Investment grade credit remained flat on June 30 while low beta high yield names were seen widening by a cash price of 0-0.5 and high beta bonds down by around one point. On the morning of July 2, high grade credits were spotted around 5bp wider on average, but the market in general remained calm.

“Greece missed the IMF payment due on June 30, which was expected, but no one here [Asia] is panicking,” said a DCM head. “We just keep doing our job — closely watching the market and choosing good windows for clients. We are just stepping aside for now since even a good IG credit may have to pay hefty premium of 30bp-50bp. But I’m very encouraged to see how Asian secondary reacts to the Greek crisis.”

Greece’s problems might turn out to be a blessing for Asia, he said.

“What I hear from global roadshows is investors are increasingly turning their eyes to and getting more comfortable with Asian fundamentals compared to other emerging markets in LatAm or EMEA, and I believe that Asia could stand out as a safe haven,” the DCM head said.

Let’s talk about China

However, it does not mean the Asian bond market has a smooth road ahead for the second half of the year. Many people GlobalCapital Asia spoke to forecast that bond activity in H2 would struggle to match the first half in primary volumes and secondary performance.

“We really should stop talking about Greece and pay more attention to all the indicators that point to China’s slowdown,” the fund manager said.

One piece of data he highlighted was the country’s fixed-asset investment, a key barometer for growth, which dropped sharply from 13.5% year-on-year in March this year to 12% in May. This comes in a year when GDP growth is expected to fall below 7% for the first time since 2009.  

Adding to the malaise was the country’s feverish stock market that plunged almost 20% in two weeks from June 12.

This slide was part of the rationale behind the People’s Bank of China’s aggressive monetary easing decision on June 27. The central bank cut its one-year benchmark lending rate by 25bp to 4.85% and its one-year deposit rate by the same amount to 2%.

However, the move failed to calm markets with China’s stock exchanges continuing to register sharp swings this week.

“In normal times, we would have seen at least a few positive signs taking place across the capital markets. But look how China’s equities have been performing after the decision. I don’t know how to explain this abnormality,” the fund manager said.

This China-driven volatility is more serious than Greece and will linger, and heralds a quiet summer for the Asian bonds market before activity picks up in September or October, he added.

Secondary bond performance will suffer too, said a Hong Kong based senior credit analyst, as rising China risk becomes entangled with a possible rate hike by US Federal Reserves in September.

“I expect Asia IG credit to widen by 15bp over the next six months and Asia high yield by 50bp, which implies a 20bp widening for the overall Asia credit universe from 204bp to 224bp,” the senior analyst said.

Not so pessimistic, yet

But some still believe that the Chinese slowdown will not necessarily take its toll on Asia’s bond market. Strong cash inflows from China’s monetary easing, as well as a prolonged period of low policy rates, are part of their reasoning. 

“I’m generally more positive,” said a second head of DCM. “Despite signs of a little slowdown, the Chinese government is, proactively and rightly so, pushing out with stimulus to support the economy. Meanwhile, the US economy is robust and getting in better shape,”

And he expected plenty of new issuance to flood in from China once the market opens again.

“The pipeline has been built up and once the market reopens, which I expect to be in early July, we will see not only senior bonds but riskier subordinated bonds, including bank capital deals and insurance capital trades from Chinese issuers,” he said. “I also expect the One Belt, One Road concept will create good opportunities for the offshore DCM market,” he said.