(Bloomberg) — The lackluster demand for Asian dollar bonds is likely to recover as investors who shunned weaker quality notes during the turbulent final quarter of 2018 now see them as too cheap to ignore.
Overall orders fell in the last three months of last year, with demand skewed toward quality names as investors sought shelter amid the worst sell-off in a decade. Yields on Asian junk bonds surged to a seven-year high of 9 percent at the end of November. However, the routoffers a window of opportunity to look for bargains, according to Aberdeen Standard Investments.
“The story of 2018 was the dramatic widening in Asia high-yield spreads,” said Paul Lukaszewski, head of Asian corporate debt & emerging market credit research at Aberdeen Standard. “The current market is fertile with opportunities to generate attractive returns” and “Chinese high yield remains an outlier in that it continues to offer compelling valuations far above historic averages,” he said.
A rebound in investor demand is crucial for Asian borrowers this year where they will face a test of endurance given their heavy refinancing needs, especially Chinese companies that are grappling with $105 billion of maturing notes. Asia dollar bond sales may total $250 billion to $300 billion in 2019, according to a Bloomberg survey.
The amount of orders for high-grade dollar bonds priced in Asia excluding Japan compared with the actual deal sizes between October and December rose to 4.1 times from 3.7 times the prior quarter, according to data compiled by Bloomberg where deal statistics are available. The so-called subscription ratio for high-yield notes in the same period eased to 1.9 times from 4.1 times.
Read about bankers’ forecasts for heavy issuance from Asia in 2019
Goldman Sachs Group Inc. said in a note in December that investors should remain cautious toward the riskiest junk names and move up in quality across both investment grade and high yield bonds on the late-cycle dynamics in the U.S. economy. Yields on Asian junk bonds reached 8.9 percent at the end of 2018, according to a Bloomberg Barclays index.
Yet the best monthly returns since July 2016 in December is a strong sign that risk appetite will improve for the new year.
Chinese real estate firms, which accounted for more than two thirds of the high-yield dollar notes in the region, received orders for 2.6 times the actual issue size in the last quarter, the lowest demand since at least the first quarter of 2016, the data show. But investors including Loomis Sayles Investments Asia Pte., Nikko Asset Management and Triada Capital Ltd. are now seeing opportunities in the developers’ bonds.
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“I am quite constructive on the property dollar bonds as bond prices have corrected notably from a year ago and the new issues in 2019 will likely focus on refinancing, as we expect to see improved onshore bond market going forward,” said Zhi Wei Feng, a senior credit analyst at Loomis Sayles Investments Asia in Singapore.