Asia’s credit markets started 2019 with a strong start – especially with regards to high-yield issuance, which hit a record high in the first quarter1. But at the same time there are growing concerns over a range of ongoing issues that could negatively impact sentiment towards credit as an asset class. These include fear of a recession in the US, international trade tensions, as well as defaults in China.
Making sense of the developments requires a global perspective, which was provided by HSBC analysts presenting at the bank’s third Credit Conference in Hong Kong in September.
One of the main concerns of credit investors is the inversion of the yield curve for US Treasuries. This is when the rates of short-term bonds go higher than longer duration securities and is often interpreted as a sign that the US is about to run into a recession.
But such a conclusion is perhaps too hasty, said Dilip Shahani, Head of Global Research, Asia Pacific at HSBC. “The inverted yield curve does not give a timeframe, describe the intensity, or even say that a recession is going to happen. But investors certainly believe it is going to happen.”
The low rates of 10 Year Treasuries can instead be interpreted as a reflection of a massive savings glut hitting the US, as money is attracted to a relatively high return in a safe market. Furthermore, he said that concerns over the trade tension between China and the US should not impact the world’s largest economy too much.
“I can understand why there are concerns, but it is not clear that there is going to be a recession for the US. The trade issues are already priced in the market, and the currencies have adjusted.”
Developments in China
Shifting the focus back to Asia, the next presentation discussed the outlook for medium-term issuance in the US dollar bond market in the region. The growth in issues of new dollar-denominated bonds in Asia has likely peaked and there will be a slowdown in the coming years, said Keith Chan, Head of Corporate Credit Research, Asia Pacific, HSBC.
The reasoning behind this prediction rests with China, a market that has driven the growth of the Asian USD bond space over the last decade, having grown from a market size of USD27 billion at the end of 2010 to USD685 billion in September 2019. The country now accounts for a significant chunk of Asia’s total outstanding debt.
There has already been a consistent drop in net supply in US dollar debt from China since 2017. That trend is likely to continue due to a reduction in US dollar quota approvals given out by the National Development and Reform Council (NDRC) since May this year – especially for local government finance vehicles (LGFVs) and property developers, which are both dependent on local currency revenues.
“We started to see the NDRC tighten the screws in terms of quota approvals of new issuances since May 2019, in preparation for escalated currency volatility,” said Mr. Chan.
Away from issuance of new bonds in China, investors are concerned over the wave of defaults taking place in the country’s onshore bond market. “Investors can be more prepared by understanding the local default trends,” said Helen Huang, Fixed Income Analyst at HSBC.
She said that the trouble in China’s bond market appears to have crossed its peak, as the amount of defaulted bond payments – the value of defaults in the second quarter of 2019, was significantly less than in the final quarter of last year. It is also worth noting that debt repayment issues in the fixed income market are primarily a private-sector phenomenon, with the much larger volume of state-owned paper largely unaffected.
There is a clear legal framework to deal with default in onshore bond market, but there exist obstacles in execution. “Investors need to go through a number of procedures, and each could take months or years,” said Ms. Huang.