There have been zero bond deals from G3 Asia ex-Japan this week as borrowers step back to analyse market conditions, which have been deteriorating and could potentially threaten issuance until year-end.
Fears that the Federal Reserve (Fed) could reduce the pace of its bond-buying programme sooner-than-expected have emerged once again, with Dennis Lockhart, president of the Atlanta Fed, highlighting in a Bloomberg Radio interview on Tuesday that tapering “could very well take place” in December.
This sent jitters across credit markets, causing US Treasury yields to spike. Ten-year benchmark yields, for example, touched 2.79% on Tuesday – the highest since September 18, according to Bloomberg data.
“Had the Atlanta Fed president kept his mouth closed in the afternoon in New York, we would have announced four deals [in Asia today],” said a Hong Kong-based syndicate banker to FinanceAsia. “If he had indicated January, then maybe we would have seen a rally and would have probably been able to launch those deals this morning.”
Asia ex-Japan G3 bond activity has not been this quiet since the week of July 2, which saw zero deals come to market, according to Dealogic data. The summer months were also primarily a victim of ongoing Fed talk of a potential tapering, which was meant to take place in September but failed to materialise as US growth was still too fragile.
Nonetheless, increased speculation that the US central bank will begin winding down the US economic stimulus next month returned last week, strongly supported by the nation’s latest job growth figures, which beat market expectations.
The world’s biggest economy shrugged off the impact of the three-week government shutdown to create 204,000 new jobs in October – an announcement that was made on November 8. Financial markets were initially bracing for an increase of 120,000 from non-farm payrolls.
“For investors in Asia, this may not be welcome news,” wrote Frederic Neumann, co-head of Asian economics at HSBC in a report on Monday. “The thinking is that higher interest rates in the US will slow, if not reverse, the stream of money pouring into the region, knocking down growth that has come to rely more and more on leverage.”
As a result, credit markets have sold off. High-yield spreads have widened by 2bp in Asia over the past week, while investment grade spreads widened 4bp, according to Morgan Stanley in a report on Monday.
Investment grade borrowers
Given the bleak outlook on the Asian credit space towards year-end, debt capital market experts believe that only the creditworthy issuers will be able to access the market, while investors are expected to shy away from riskier, higher-yielding names.
“We are talking about tapering and potentially a 50bp move higher within the next few weeks, there’s more than a good chance that the high-yield bond or par bond today is not going to be trading at par at the end of the year,” said the syndicate banker.
“As a result, we do expect to see a busy next three weeks primarily focused on defensive investment grade,” he added.
Over the course of the summer – when Asia’s bond markets were experiencing a lull – the number of investment grade issuance that came to market far exceeds high-yields and is something that could occur in the remaining weeks of the year.
The G3 corporate investment grade volumes reached $6 billion with 18 deals for Asia ex-Japan from June to August while the G3 high yield’s volumes touched $424 million with merely three deals, according to Dealogic data.
China Overseas Grand Ocean
While no G3 bonds have been priced in Asia ex-Japan this week, one corporate issuer has announced a roadshow braving ongoing market uncertainty.
China Overseas Grand Oceans Group, a core member of the China Overseas Land & Investment Group, has hired Bank of America Merrill Lynch, DBS, ICBC International, Macquarie and UBS to arrange a series of fixed-income investor meetings. The meetings, which take place in Asia and Europe, start today.
Fitch and Standard & Poor’s have rated the credit BBB and BBB- respectively.
Last week, Chinese real estate developer Dalian Wanda Commercial Properties postponed its benchmark five-year trade that had been announced on November 7 after a softer market backdrop led to weak demand, say sources.
Bank of America Merrill Lynch, Barclays, Goldman Sachs, HSBC and UBS, who worked as joint global coordinators, bookrunners and lead managers, had announced Dalian Wanda’s trade at Treasuries plus 325bp. The Reg S bond was expected to be rated Baa3/BBB-/BBB+.