Attractiveness of bargains gives hope to Asian debt after loss


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(Bloomberg) – Fund managers are looking for bargains in Chinese developer dollar bonds, which could help the wider Asian credit market in 2022 after suffering record losses last year.

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Asian dollar notes of all ratings fell 2.8% last year, their worst performance in a Bloomberg index dating back more than a decade. This was mainly the result of a collapse in Chinese real estate bonds, which account for a large chunk of the region’s banknotes. As this segment collapsed, it weakened demand, even for debt from healthier borrowers.

But there have been signs of investors returning, after Beijing stepped up efforts to prevent a housing slowdown from pushing the world’s No.2 economy into a deeper collapse. Bulls are betting Chinese policymakers will put in place stronger fiscal and monetary stimulus this year, helping to relieve a dollar bond market haunted by the prospect of rising global inflation and interest rates .

“Most of the alpha for Asian high yields, and Asian credit as a whole, in 2022 will undoubtedly come from high yielding Chinese real estate given the high valuations at present,” wrote Nomura International (HK) Ltd. analysts, including Nicholas Yap, referencing returns above benchmarks on an investment. “It is ultimately a matter of timing and credit selection.”

Global fund managers, from the Singapore sovereign wealth fund to a former Goldman Sachs Group Inc. banker, are seeing more and more opportunities in Chinese developer debt.

At Goldman, analysts’ baseline scenario is for the default rate on Asian high yield bonds to drop to 6.5% in 2022 from 17.2% in 2021.

However, navigating a risky timetable will not be easy. Chinese real estate companies face a record $ 27 billion in dollar bonds maturing in the first half of this year.

Investors will face any further increase in global yields, with the Federal Reserve set to largely hike interest rates three times this year to fight inflation. Junk debt tends to do better when rates rise, given the larger yield cushion.

“Given the spread situation, higher-grade Asian credits and higher-grade sovereigns are likely to be the most affected by Fed rate hikes,” Jefferies analysts wrote in a note, including Brent Eastburg and Rohan Thakrar.

Some expect it to create more value.

Mark Reade, head of fixed income research at Mizuho Securities Asia, said any Fed-induced drop in Asian dollar bonds could provide a buying opportunity, as pressures on consumer prices s ‘will probably gradually ease.

He predicts that high-quality Asian bonds will return around 3.5% in 2022 and high-yield bonds just over 10%.

Any easing of policy by the Chinese central bank could also help strengthen the credit quality of companies by reducing their domestic financing costs. Given the recent strengthening of the dollar, which is pushing up the cost of servicing debt abroad, this would be a critical area of ​​support.

(Updates with Goldman data in sixth paragraph.)

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