Asian Junk Bonds Can’t Catch a Break

By Anonymous

Asian stocks fell Wednesday, following slight declines in the U.S. overnight. Indonesia’s Jakarta Composite slumped 2.9%, putting it on track for one of its worst days this year, as the country’s currency hovered near two-decade lows. Hong Kong’s Hang Seng fell 1.7% as did the benchmark index in the Philippines.

Asian junk bonds have tumbled in price this year, resulting in a big gap between yields on these sub-investment grade securities and their U.S. peers.

What’s Happening

In recent years, riskier companies in Asia have been able to borrow at rates around or slightly higher than similar firms in the U.S., thanks to strong local appetite for dollar debt. That kept the spread, or difference in yields, between the two regions quite small.

Asian high-yield bonds yielded 6.1% at the end of 2017, compared with 6.15% in the U.S., according to ICE Bank of America Merrill Lynch indexes. Since then, however, that gap has blown out. In recent action, Asian junk bonds sported rates of 8.3%, compared with 6.55% for their U.S. counterparts.

The selloff partly reflects a broader malaise in emerging markets. U.S. interest rate increases and a stronger dollar have lured cash back to America, often at the expense of developing economies. Some countries have come under additional pressure because of U.S. tariffs or sanctions, while economic turmoil in Turkey and Argentina have further fueled investors’ concerns.

The market has, however, recovered from the worst of the selloff in July—when that spread widened to its most in 19 years, and yields briefly topped 9%—as investor pessimism about China receded slightly.

Many speculative-grade bonds in Asia were issued by Chinese property developers such as Country Garden Holdings Co. , China Evergrande Group and Sunac China Holdings Ltd.

These outfits earn money within China and will now find it more expensive to repay or roll over their maturing dollar debt given the drop in the yuan against the dollar. The CSI 300 Real Estate Index, which includes stocks of developers listed onshore, has slumped 20% this year. A bond sold by Evergrande last year with an 8.75% coupon, maturing in 2025, has fallen in price so it now yields nearly 11%.

Market Reaction

Some investors have stepped back into the market. Colin Graham, head of multi-asset solutions at Eastspring Investments, said he’s buying because yields above 8% look attractive.

“These bonds have been sold off too much in regard to trade,” he said, adding that even if the U.S. imposes more levies on Chinese goods, it shouldn’t shave off too much from the country’s economic growth.


One dollar bought 14,926 Indonesian rupiah, as the currency of southeast Asia’s largest economy stood close to its weakest in 20 years.

Write to Saumya Vaishampayan at [email protected]