* 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
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
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
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."
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