Risky Asian bonds seen weathering US storm

Thu Aug 14, 2014 5:32am EDT

Related Topics

* Asian sub-investment grade bonds recovering this week

* US high-yield bond funds suffer record run of withdrawals

* Regional investors looking for buying opportunities

By Lianting Tu

HONG KONG, Aug 14 (IFR) - Asian high-yield bonds are rebounding as regional investors seize a buying opportunity following weeks of outflows from US junk bond funds.

Cash prices on low-rated Asian bonds slipped as much as 1.5 to 3 points over the last two weeks as worsening geopolitical tensions prompted US investors to pull money out of high-yield funds at a record pace.

Prices have regained some ground this week, however, and fixed-income specialists in Asia expect a sell-off of in some of the hardest-hit credits to be contained as pension funds, asset managers and other so-called real money investors in the region look to put cash to work.

The broader Asian high-yield market has rebounded 0.2% this week through Wednesday after losing 0.49% last week, according to JP Morgan's JACI Non-Investment Grade Index.

"There is a tug of war between fear and greed," said David Lai, portfolio manager at Eastspring Investments, the Asian investment arm of UK insurer Prudential.

"There is definitely more uncertainty in the near future, which means investors tend to be more risk-averse. But the search for yield is still on in this low-rate environment, which is the greedy part."

Outflows from US high-yield mutual funds and exchange-traded funds reached US$16.9bn after 22 days of consecutive outflows through August 11, according to data from EPFR and Barclays. The 22-day streak is a record, surpassing a 20-day streak in June 2011.

US HOLDERS

High-yield Asian bonds in the energy, technology and gaming sector are the most exposed to US outflows as they are the most widely held by US investors, traders said. High-yielding sovereign credits from the Republic of Indonesia and the Philippines also took hits.

"The continued outflows will affect Asian high yield and we expect more downward pressure in the near future," said Charles Macgregor, managing director and head of Asia for Lucror Analytics, an independent high-yield research house.

Bonds issued from Chinese energy firms Anton Oilfield Services Group, MIE Holdings and industrial gas producer Yingde Gas, as well as India's IT services provider Rolta India and clean energy company Greenko Group suffered the biggest price drops.

More than one third of Rolta's US$300m 144A/Reg S five-year non-call three-year offering was sold to US investors in July, while MIE Holdings sold 37% of its US$500m five-year non-call three-year bonds to the US in April.

"US investors are trimming Asian risk along with their overall portfolios," said a fixed-income salesperson at an international bank. "Asian high-yield is a non-core part of their portfolios."

Sovereign US dollar bonds from Indonesia, which has a crossover rating of Baa3/BB+/BBB- with a sub-investment grade score from Standard & Poor's, also experienced a steep decline in cash prices. Indonesia's long-dated bonds dropped four points in the last two weeks.

US investors had bought more than 60% of Indonesia's US$4bn dual-tranche offering of 10-year and 30-year bonds when the deal was launched in January.

"There is definitely a correlation between the US high-yield outflow and sell-off in Indonesian and Philippine paper," an emerging market sovereign bond trader said.

"The outflow, combined with escalating geopolitical tensions in various parts of the world, has translated to negative sentiment and risk-off mode."

SELL-OFF EXAGGERATED

Still, there are reasons to believe the worst of the sell-off may already be over.

"We are seeing less than half of the normal volume these days, so the sell-off could be a bit exaggerated," a Singapore-based bond salesman said.

US high-yield fund outflows may be stabilising, according to a JP Morgan research report on Monday. Analysts noted that the acceleration in the past week was driven by outflows from mutual funds, which tend to lag market moves.

Indeed, overall emerging market bond fund flows reversed into an outflow pattern last week for the first time since April, driven entirely by US dollar EM fund outflows.

Bond bulls also blame the US outflows on shaky geopolitical conditions, rather than deteriorating fundamentals.

While flashpoints in Ukraine, Israel and Iraq have sent many investors to the sidelines, others are spotting buying opportunities. Credit spreads on Asian high-yield bonds narrowed 15bp this week after widening 25bp last week.

"Real money investors still have dry powder to invest as they are sitting on 5%-10% cash. So there should be gradual spread tightening," a Singapore fixed-income saleswoman said. (Reporting by Lianting Tu. Editing by Abby Schultz and Steve Garton)

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