Dow Jones – A trio of cancelled bond sales and weakening investor demand for emerging-market junk bonds are pointing to new strains in Asia’s credit markets, after a strong rally earlier this year.
In recent days, industrial companies in China, Hong Kong and Indonesia pulled planned sales totalling $800m in US dollar bonds. The companies, which include a steelmaker, a solar-energy producer and a palm-oil producer, blamed weak market sentiment, according to bankers and investors.
Other companies were able to sell junk bonds to raise cash this week, but in a shift from the hospitable environment a few months ago, some sold their debt at interest rates close to the yields they initially offered investors.
Companies typically offer more generous yields when marketing their bonds and later price the securities at lower rates when investor orders exceed the amount offered.
The recent weakness comes amid a correction in junk-bond prices from the US to Asia that has mostly affected riskier issuers.
As prices have fallen, yields on global high-yield and emerging-market bonds have climbed. The average “spread”—or the gap between yields on these bonds and US Treasuries—this week hit a two-month high of 3.88%, after touching a multi-year low of 3.41% in late October, according to a Bank of America Merrill Lynch index. The index has gained 8.6% so far this year.
Government-bond yields are also rising in parts of Asia. The yield on India’s 10-year government bond rose above 7% this week, hitting its highest level since September 2016. China’s benchmark 10-year yield jumped to a three-year high this week, briefly touching 4%.
Yield-hungry investors have ploughed billions of dollars into emerging-market bonds this year, driving a record rally that has enabled even the poorest nations and indebted companies to borrow at low interest rates.
Market participants are now watching for signs of a turn in sentiment as major central banks, led by the Federal Reserve (Fed), take steps to reverse years of easy monetary policies.
Even so, many investors say central banks will taper their bond purchases or raise interest rates slowly as inflation remains low, a backdrop that still makes higher-yielding assets attractive.
Given the strong rally earlier this year, “it was inevitable that emerging markets would go through an air pocket,” said Luke Spajic, head of portfolio management emerging Asia at Pimco.
Asia has captured the majority of inflows into emerging-market debt in 2017, but recent data suggest the trend may be waning.
Foreign investors were net sellers of emerging-market debt in Asia for the first time this year in October, according to Australia and New Zealand Banking Group, pulling $300m out of the region’s markets.
Investors have turned more cautious ahead of a flurry of new dollar bond deals coming before the US Thanksgiving holiday next week.
Many issuers are also preparing to sell bonds before Christmas ahead of the Fed’s next interest-rate increase. They include Chinese internet giants Alibaba and Baidu, which are planning or considering US dollar bond sales, according to people familiar with the matter.