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Strains Emerge in Asia's Bond Market as Debt Issuers Cancel Sales

17 Nov 2017 10:54 am
By Manju Dalal and Saumya Vaishampayan 

A trio of canceled 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 totaling $800 million in U.S. 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 U.S. 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 U.S. Treasurys--this week hit a two-month high of 3.88 percentage points, after touching a multiyear low of 3.41 percentage points 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 plowed 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, 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 Pacific Investment Management Co., or Pimco.

Asia has a 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 Ltd., yanking $300 million out of the region's markets.

Investors have turned more cautious ahead of a flurry of new dollar bond deals coming before the U.S. 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 Group Holding Ltd. and Baidu Inc., which are planning or considering U.S. dollar bond sales, according to people familiar with the matter.

Hong Kong-listed Concord New Energy Group Ltd., which has a high speculative-grade credit rating, this week tried to sell three-year dollar bonds at a yield of 7.125%, but failed to attract sufficient investor demand for the offering. An S&P Global report pointed to regulatory uncertainty around renewable-energy projects in China, where the company is trying to expand.

Chinese steelmaker Inner Mongolia BaoTou Steel Union Co. withdrew a $200 million sale of three-year unrated bonds on which it wanted to pay 5.7%, while Indonesian palm-oil producer PT Sawit Sumbermas Sarana Tbk canceled what would have been its inaugural sale of $300 million in U.S. dollar bonds.

Ashley Perrott, head of pan-Asian fixed income at UBS Asset Management in Singapore, said he doesn't expect a rout in emerging-market bonds just yet. "When there are periods of weakness, investors have been very conditioned...to buy the dip," he said.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com

(END) Dow Jones Newswires

November 17, 2017 05:54 ET (10:54 GMT)

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