Embattled U.S. Credit Faces Threat of Asian Buyers Staying Home

(Bloomberg) -- U.S. credit can't catch a break.

After the worst quarterly loss since the global financial crisis, key support from buyers in Asia is threatened by higher charges to do business in dollars.

Currency hedging costs “are set to rise much further from here” as the Federal Reserve hikes interest rates, according to a JPMorgan Chase & Co. report published Thursday. And as Japanese government bond yields rise, domestic debt looks more attractive.

“Staying home is becoming an option once again,” wrote Eric Beinstein, head of U.S. credit strategy. “Demand should be lower.”

U.S. corporate debt still has value to Asian investors, even after currency hedging costs, according to JPMorgan. For Japanese investors, U.S. investment-grade bonds after currency hedging have a net yield of 2.93%, in the 99th percentile of the last five years, it added.

Asian investors had flocked to U.S. high-grade corporates in recent weeks, helping underpin primary and secondary markets. The buyers were mainly Japanese and Taiwanese insurers and pension funds, chasing comparatively higher yields on U.S. debt, including shorter-dated maturities that they typically avoid.

“Prior to the recent rate move, Asian insurance players had to invest in long-dated tenors to achieve their minimum yield objectives,” Meghan Graper, head of U.S. investment grade syndicate at Barclays Plc, said in an interview. “Now there are situations where even participating in the front end of the curve can afford them opportunities to meet those equivalent thresholds.”

Overseas demand has been “undoubtedly helping to underpin tone in the investment grade markets,” Graper added.

Even if foreign buying wanes, U.S. demand is expected to hold, including from pension funds and insurers. Stability of risk premiums in the face of heavy new issuance, “suggests that net demand for [high-grade] remains robust,” JPMorgan's Beinstein wrote.

Elsewhere in credit markets:

Americas

Seven issuers are selling new U.S. investment-grade bonds Thursday, capping off a blowout month that has seen more than $215 billion of supply so far, good for the fourth busiest ever.

Banks are pre-marketing a $1.85 billion leveraged loan in both the U.S. and Europe to back an acquisition of testing company Element Materials Technology, people close to the matter said
A private-equity consortium has obtained committed debt financing of about $11.15 billion from a group of banks and other lenders to finance its acquisition of television-ratings firm Nielsen Holdings
For deal updates, click here for the New Issue Monitor
For more, click here for the Credit Daybook Americas

EMEA

Seven borrowers sold new bonds in the primary market on Thursday, lifting sales for the week to 39 billion euros ($43 billion) and yearly volume past 500 billion euros.

Creditors to Ukraine's largest poultry producer MHP SE agreed to grant the company nine months to make interest payments on $1.4 billion of bonds
Europe's junk-rated firms face higher refinancing costs as Russia's invasion of Ukraine exacerbates concerns over borrowing amid an alarming rise in inflation and the prospect of tighter monetary policy. Sales of new high-yield bonds collapsed 70% in the first quarter as sentiment for sub-investment grade credit soured
Russian government bondholders would be left with no viable path to recover their money if the country defaults, according to one of the top global lawyers in sovereign debt litigation. Jay Auslander believes there would be little scope for litigating Russia in court in case of a default at least until the end of the conflict in Ukraine
Elsewhere, EnQuest has invited holders of 190.5 million pounds 7% notes originally due February 2022 and extended to October 2023, to exchange them for new 9% notes due October 27, 2027
For more on Russia's debt watch: Russia Debt Watch: Russian Railways, EuroChem, Petropavlovsk

Asia

Three companies marketed dollar bonds in Asia on Thursday as investors monitor whether a U.S. plan to release crude from its reserves will help contain inflation.

Asia ex-Japan investment-grade credit default swaps widened for a second day, the longest such streak in more than two weeks
Spreads on Asian investment-grade dollar bonds were flat to 2bps wider. Chinese high-yield dollar bonds, dominated by developers, are on track for their 10th gain in 11 sessions
Dollar bond issuance in Asia excluding Japan has dropped off from the week before, with sales of around $3.8 billion so far this week versus more than $9 billion the week before