Lure of Junk Bargains Gives Hope for Asia Debt After Loss

(Bloomberg) -- Money managers are hunting for bargains among Chinese developer dollar bonds, which may help the broader Asian credit market in 2022 after it suffered record losses last year.

Asian dollar notes of all ratings lost 2.8% last year, their worst performance in a Bloomberg index going back more than a decade. That mainly resulted from a meltdown in Chinese property bonds, which account for a large part of the region's junk notes. As that segment slumped, it weakened demand even for debt from healthier borrowers.

But there have been signs of more investors wading back in, after Beijing stepped up efforts to prevent a property slowdown from pushing the world's No. 2 economy into a deeper slump. Bulls are betting that Chinese policymakers will roll out more potent fiscal and monetary stimulus this year, helping take some pressure off a dollar bond market haunted by the prospect of rising global inflation and interest rates.

“The bulk of the alpha for Asia high yields, and overall Asia credit, in 2022 will no doubt come from China high-yield property given wide valuations at present,” Nomura International (HK) Ltd. analysts including Nicholas Yap wrote, referring to benchmark-beating returns on an investment. “It is ultimately an issue of timing and credit selection.”

Global money managers, from Singapore's sovereign wealth fund to a former banker at Goldman Sachs Group Inc., are increasingly eyeing opportunities in Chinese developer debt.

At Goldman, analysts' base case is for a drop in the default rate for Asia high-yield bonds to 6.5% in 2022 from 17.2% in 2021.

Still, navigating a calendar fraught with risks won't be easy. Chinese real estate firms face a record $27 billion of maturing dollar bonds in the first half of this year.

Investors will have to navigate any further increase in global yields, with the Federal Reserve widely anticipated to raise interest rates three times this year to combat inflation. Junk debt tends to do better when rates are rising given the bigger yield buffer.

“Given where spreads are, Asia investment-grade credits and investment-grade sovereigns are likely to be impacted most by the Fed rate hikes,” Jefferies analysts including Brent Eastburg and Rohan Thakrar wrote in a note.

Some expect that could create more value.

Mark Reade, head of fixed-income desk research at Mizuho Securities Asia, said any Fed-induced dip in Asian dollar bonds may offer a buying opportunity as consumer price pressures will likely gradually abate.

He forecasts Asian investment-grade bonds will return about 3.5% in 2022, and high-yield notes a little over 10%.

Any policy easing by China's central bank could also help bolster firms' credit quality by cutting their domestic funding costs. Given recent strengthening in the dollar, which pushes up the cost to service overseas debt, that would be a crucial area of support.