Asian bonds tumble below par in capital flight


By David Yong
Bloomberg News
Sunday, September 1, 2013

SINGAPORE -- Asia dollar-denominated bonds have dropped below par for the first time since 2011 as investors pull money out of the region amid concerns that growth is slowing and as currencies from the rupee to rupiah plunge.

Average prices of company debentures in the region fell to 98.61 cents on the dollar on Aug. 22, the least since October 2011, Bank of America Merrill Lynch indexes show. Dollar bonds globally have held above 100 cents since September 2009. Both investment- and non-investment-grade debt in Asia were below par on Aug. 22. The last time that happened was in September 2008, when Lehman Brothers Holdings Inc. collapsed.

Investor sentiment toward Asia is shifting as economic growth in China slows and currencies in India and Indonesia -- the two countries with the biggest external funding needs in the region -- plunge. About $44 billion has been pulled from emerging-market stock and bond funds globally since the end of May, data provider EPFR Global said on Aug. 23.

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"You risk being swept away by fund outflows even if you buy bonds from the best companies in Asia," said Ben Bennett, a global credit strategist in London at Legal & General Investment Management, which manages $670 billion. "You'd need to be very brave to add credit risk before currencies show signs of stabilization."

India's rupee fell the most in 20 years last week as the government said the nation's economy expanded at the weakest pace since 2009 last quarter, or 4.4 percent from a year earlier. August was the worst month for Indonesia's rupiah since the global financial crisis.

Slowing economic growth is raising concern that Asian companies will have a harder time servicing higher levels of leverage after they boosted U.S. currency bond sales by 94 percent in 2012 to a record $124.7 billion.

Morgan Stanley predicted on Aug. 22 corporate defaults in Asia excluding Japan will climb to 1.8 percent over the next 12 months from 0.8 percent in December, as three years of binge borrowing saddles the region with the most indebted balance sheets in the world.

Globally, about $20.5 billion has been withdrawn from emerging-market bond funds since May 22, Cambridge, Massachusetts-based EPFR said.

That was after Federal Reserve Chairman Ben S. Bernanke told Congress the central bank could cut back on the $85 billion it is injecting into the financial system every month through its purchases of Treasuries and mortgage bonds if U.S. economic growth showed signs of being sustained. Emerging-market debt has since lost 6.4 percent, according to Bloomberg's USD Emerging Market Corporate Bond Index.

Elsewhere in credit markets, the extra yield investors demand to hold investment-grade corporate bonds globally rather than government debentures widened for the second week. Global bond sales increased for the first time in three weeks, capping the slowest month for issuance this year. Loan prices declined for a sixth week to complete the third monthly drop since April.

Relative yields on investment-grade bonds from the U.S. to Europe and Asia expanded 1 basis point to 148 basis points, or 1.48 percentage points, according to the Bank of America Merrill Lynch Global Corporate Index. Spreads narrowed 2 basis points for the month as yields rose to 3.09 percent from 2.99 percent on July 31.

The cost of protecting corporate bonds from default in the U.S. jumped. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 5.5 basis points last week to a mid-price of 84.1 basis points, according to prices compiled by Bloomberg. The measure rose 9.4 basis points in August, the biggest monthly increase since May 2012.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 6.2 last week to 107.2, extending August’s increase to 7.3 basis points. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 2 to 162 as of 8:59 a.m. in Singapore, Australia & New Zealand Banking Group Ltd. prices show.

The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

The Bloomberg Global Investment Grade Corporate Bond Index (BCOR) declined 0.8 percent in August, bringing losses for the year to 3.3 percent.

Bonds of Fairfield, Connecticut-based General Electric Co. (GE) were the most actively traded dollar-denominated corporate securities by dealers last week, accounting for 3.3 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Orange SA (ORA), France's largest phone company, and luxury carmaker Bayerische Motoren Werke AG led $38.9 billion of corporate bond sales worldwide last week, a 13 percent increase from $34.5 billion in the period ended Aug. 23, Bloomberg data show.

Paris-based Orange, previously known as France Telecom, raised 1.5 billion euros in a two-part sale, including 850 million euros of 1.875 percent, five-year notes to yield 60 basis points more than the mid-swap rate. BMW's 1.25 billion-euro offering included 750 million euros of 2 percent, seven-year bonds to yield 35 basis points more than swaps.

The S&P/LSTA U.S. Leveraged Loan 100 index fell 0.02 cent to 97.65 cents on the dollar last week, extending August’s slump to 0.6 cent. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, reached a seven-week low of 97.62 cents on Aug. 28. It has returned 2.97 percent this year.

In emerging markets, relative yields widened 11.6 basis points last week to 375.1 basis points, according to JPMorgan Chase & Co.'s EMBI Global index. The measure, which has expanded from this year's low of 245.4 on Jan. 3, jumped 32.1 basis points in August.

Bond prices in Asia peaked this year on Jan. 15 at 108.39 cents on the dollar, a 14 percent rise from the trough in October 2011. The rally owed its momentum to Operation Twist in late September, a Fed program to lower long-term borrowing costs.

As markets unraveled, bond prices slid below par on Aug. 22, the average yield rose to a 13-month high of 5.205 percent, and spread widened to 358 basis points from January's low of 273, according to Bank of America Corp. U.S. corporate debt averaged 105.49 on Aug. 30 and yielded 3.46 percent.

Asia's role as the world's growth engine is diminishing as economies from China to Malaysia and Indonesia cooled while Thailand fell into a recession. The International Monetary Fund in July cut its forecast for 2013 growth in developing Asia by 0.3 percentage point to 6.9 percent.

At the same time, the Federal Open Market Committee may trim monthly bond purchases, which has benefited risky assets globally as investors search for high yields, by $10 billion at its meeting this month, and end the buying by mid-2014, based on the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13. The FOMC next meets on Sept. 17-18.

"There's no question that if we see a September tapering, there'll be a market response and there's going to be a lot of short-term volatility on the back of that across all markets," Amanda Stitt, a London-based investment director at Legg Mason Global Asset Management, said in an interview in Singapore on Aug. 16. "Everything is taking direction from U.S. tapering talk. It's hard to pick the bottom."

Bonds sold by Baidu Inc. (BIDU), the operator of China's most popular search engine, are among the casualties. Its $750 million of 3.5 percent notes due November 2022 have declined 7 percent this year to 90.86 cents on Aug. 30.

Losses accelerated in May as the price fell below par, dipping to as low as 87.61 cents in June. The company is rated A3, or four levels above junk, by Moody’s Investors Service.

PT Perusahaan Listrik Negara's debt is trading below 70 cents on the dollar. The Jakarta-based state-owned power utility's $1 billion of 5.25 percent notes due October 2042 have slumped 30 percent this year as the price slumped to 68.22 on Aug. 28. The notes are rated Baa3, the lowest level of investment grade at Moody's.

Asia's troubles come at a time when investors are finding comfort in developed markets, as the euro-area economy emerges from the longest recession on record and growth in the world's biggest economy last quarter surpassed economists' expectations.

"We've been more cautious about emerging-market risk for a few months now and have been looking more toward improvements in developed-market economies for opportunities," Legal & General's Bennett said. "This is particularly the case in Europe, with consumer-facing companies and even some of the banks in a position to benefit from economic tailwinds."

Borrowers in Asia outside Japan have raised $94.5 billion from dollar bond sales since Dec. 31, with 91 percent of that amount issued in the first five months of the year, according to Bloomberg-compiled data. As sentiment soured, 155 of the 186 securities were trading below their issue price as of Aug. 29.

"Risk appetite for Asian bonds is anemic at the moment," said Keith Chan, a Hong Kong-based credit analyst at HSBC Holdings Plc. "Investors will most likely stay cautious until we see some stability in the primary market and new deals begin to perform in secondary trading."

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