Hunt for yield continues across Asia

US Treasuries hover around year-to-date lows, boosting prospects for a strong debt pipeline in June.
Li Keqiang
Li Keqiang

Asian credit markets are maintaining their recent strong performance, with spreads tightening across the board last week as investors’ hunt for yield continues as US Treasuries hit their lowest level in almost a year.

The yield of 10-year US Treasury note fell to 2.44% last Thursday, the lowest closing level since June 2013. Since then yields have rebounded to 2.5% but are still relatively low compared to the beginning of the year when yields touched as high as 3%, according to Bloomberg data.

Sentiment towards the region was further lifted by better prospects of policy easing in China after premier Li Keqiang’s comments on monetary policy and a Ministry of Finance statement urging an acceleration of fiscal expenditure.

The government will cut reserve requirements for some banks, boost support for small businesses and speed up spending of budgeted funds, as Premier Li seeks to meet an official expansion target of about 7.5% this year. Authorities are contending with a property slump that threatens growth while they try to sustain efforts to limit shadow banking, pollution and corruption.

As a result, credit analysts maintain a view that Asia’s spreads will grind tighter as investors search for higher returns, and they see notable value in Hong Kong investment-grade and Indonesian high-grade names.

“We expect credit spreads to be tighter at the end of this year compared with current levels, and this is largely driven by our belief that the supportive monetary conditions globally will continue to drive the search for yield,” said Kenneth Ho, credit analyst at Goldman Sachs.

“The US and European credit investors that have historically invested in developed market credits are now seeking higher available spreads in emerging market credits,” he added.

The additional easing by the European Central Bank should help keep such flows intact, Ho said. Goldman Sachs’s economists are forecasting that the ECB will cut its key interest rates by 15bp in June, encouraging fixed-income investors to look elsewhere for return.

Asia’s investment-grade sector further extended the strong momentum in recent weeks as spreads  tightened across the board. China’s BBB-rated real estate credit — a sector that has long underperformed as a result of oversupply in the first quarter of 2014 — led the strong performance with spreads around 20bp tighter, according to syndicate bankers. India’s investment-grade credit space also performed well, with the corporate space tightening by 10bp-20bp and financials by around 5bp.

The region’s high-yield sector also had a strong week last week. Chinese high-yield properties rallied by 0.5bp-1bp and industrials gained 0.25bp. Indonesian corporate and quasi-sovereign credit broadly traded 0.5bp higher, added syndicate bankers.

Strong pipeline

Although last week’s new issuance was relatively subdued — of $1.75 billion — versus some weeks where total new supply hit close to $10 billion (the week of April 21, for example, according to Dealogic data), bankers expect supply to pick up as the market stabilises.

Philippines-based SM Investment Corp is marketing a 10-year unrated benchmark dollar bond around the 5.125% area on Tuesday, according to a source close to the deal. Citi and Standard Chartered are the joint bookrunners of the transaction.

Chinese property developer Shui On Lan is marketing a five-year unrated benchmark dollar note also on Tuesday, according to a source familiar with the transaction. The Reg-S offering callable in the third year has an initial price guidance around the 9.875% area. BNP Paribas, Deutsche Bank, JPMorgan, Standard Chartered and UBS are the joint bookrunners of the transaction.

Also, the Republic of Korea mandated Barclays, BofA Merrill, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Korea Development Bank and Samsung Securities to arrange a series of investor meetings in the US and Europe on May 20. A dollar or euro issuance may follow sometime this week subject to market conditions, according to a source familiar with the matter.

China Merchants Bank has also mandated BofA Merrill, HSBC and Standard Chartered as joint global coordinators and bookrunners of its potential Reg-S dollar offering. Other bookrunners include BNP Paribas, Citi, JPMorgan and Wing Lung Bank.

The series of fixed-income meetings will commence in Hong Kong and Singapore on Tuesday. This follows China Merchant Bank’s recent establishment of a $5 billion medium-term note programme.


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