Asian high-yield is a dumb bet for smart money
(The following is an opinion piece by IFR columnist Nachum Kaplan.)
* Monetary policy has skewed risk/reward equation
* Questions linger about investor knowledge
* Desperation for yield forcing risky bets
By Nachum Kaplan
Jan 9 (IFR) - Having made vast sums of money in the primordial swamp of Asian capitalism, Asia's growing pool of high-net-worth individuals ought to be the very definition of smart money. So why are they acting so dumb?
Asia's private banks ramped up their bets on bonds in 2012, buying everything from low-risk investment-grade paper to high-yield perpetuals. While the tremendous rally in global credit left that looking like the smartest trade in the book, this hunger for yield is now leading them into dangerous - if not outright silly - territory.
If you took a poll of high-net-worth individuals in Asia six months ago, it is likely that few of them would have ever considered owning bonds from China's Shimao Property. Many would probably never even have heard of the company. Yet the Asian private bank bid this week delivered a whopping US$7bn of demand for the mainland developer's latest bond issue.
Do they really understand what they are buying here? They are hungry for yield and the only real yield in town is on sub-investment grade debt. But traditionally only a small group of specialist investors would dare book high-yield credit risk - and even fewer would consider a structurally subordinated offshore investment in the policy-controlled Chinese property sector.
High-yield bonds used to be called 'junk' for a reason, before they were rebranded into something much more palatable to wealthy investors.
Private banks used to pitch conservatism and wealth preservation to their high-net-worth clients and steer them away from exactly the sort of paper they are stuffing them with right now.
The backdrop for this is the extraordinarily loose monetary policy that is keeping global interest rates low. The problem is that it is distorting the risk/reward equation into something worryingly unsustainable. Having shifted the old junk bond label, the term 'high-yield bond' is now becoming a misnomer.
Desperation for yield means more and more players are booking these high-risk assets. And when the private bank bid alone can leave a new issue nine times oversubscribed, the inevitable consequence is that yields start dropping to levels that simply do not reflect the risks.
The average yield on a US high-yield bond has already fallen below 6% for the first time, while Shimao Property's US$800m seven-year non-call four bond generated a staggering US$17.5bn order book and came at just 6.625%. Returns are no longer being measured against the risks involved but purely in relative value terms against the zero returns available elsewhere. Risk no longer seems to be even part of the equation.
With orderbooks and yield levels like those seen on Shimao's latest issue, the Asian high-yield market is looking distinctly like a bubble. The dynamics that are in place mean this one might continue to inflate for a quite a while yet, but all bubbles eventually pop. When that happens, Asia's smart individual investors will only have themselves to blame. (By Nachum Kaplan; editing by Steve Garton)
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