A junk Dim Sum bond rally that drove yields to an 18-month low is prompting caution among funds with UOB Asset Management Ltd. preferring shorter-dated notes and Pacific Investment Management Co. wary of high debt loads.
The average yield on these yuan-denominated securities touched 4.95 percent yesterday, the least since September 2011, according to an index compiled by HSBC Holdings Plc. That’s 162 basis points, or 1.62 percentage points, more than investment- grade notes, the smallest spread since February 2011. Speculative-grade debt yields 5.93 percent in the U.S. and 6.61 percent in Asia, Bank of America Merrill Lynch indexes show.
Global investors are piling into yuan bonds maturing in less than five years on expectations the currency will strengthen as China’s economy expands, while avoiding longer- dated debt that is most at risk from rising interest rates, according to UOB Asset. Russian Standard Bank ZAO sold 500 million yuan ($80 million) of two-year notes at an 8 percent yield on Jan. 31, while the rate on New World China Land Ltd. (917)’s yuan securities due 2015 has dropped to 4.41 percent from 8.5 percent since they were sold almost a year ago.
“We have purchased all the three high-yield CNH issues so far in 2013,” said Chia Tse Chern, the Singapore-based head of Asia fixed income at UOB Asset, referring to the yuan offshore by its three-letter identifier. “We like the short-duration nature of these high-yield CNH bonds and we believe that the limited supply should potentially support the bond prices in the secondary market.”
The assets of UOB United Renminbi Bond Fund (UOBURBS) that Chia manages rose to S$56.8 million ($45.5 million) on March 4 from S$22.77 million at end-2012, according to data provided by UOB Asset Management.
Consumer prices in the world’s second-largest economy climbed 3.2 percent from a year earlier in February following a 2 percent increase the previous month, official data showed March 9. The figures were distorted by changes in the timing of the weeklong Lunar New Year holiday, which fell in February this year and January in 2012.
The supply of high-yield Dim Sum debt is limited as a strengthening yuan and relatively low interest rates in the U.S. encourage companies to tap the dollar bond market for funds. The yuan will advance 2.1 percent to 6.10 per dollar in 2013, according to the median estimate in a Bloomberg survey. China’s 10-year sovereign note yields 3.59 percent, compared with 2.07 percent for similar-maturity U.S. Treasuries.
Standard Chartered Plc. is boosting its holdings of shorter-dated offshore yuan bonds on the prospect of currency gains, according to its Singapore-based chief investment strategist Steve Brice.
Chinese and Hong Kong companies have sold a combined $15.3 billion of dollar debt so far this year, a record for the period, data compiled by Bloomberg show. There were 33 new high-yield issues in the Asia dollar bond market totaling $13.1 billion this year, compared with three in the Dim Sum bond market that raised $720 million, according to UOB’s Chia.
“High-yield companies prefer to issue in the U.S. dollar market where they can issue in larger sizes and longer tenor,” Chia said. “We think that the volume of high-yield Dim Sum issuance is likely to be limited.”
High-yield or junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
Pimco, the manager of the world’s biggest bond fund, is concerned about the quality of companies selling these yuan- denominated bonds in Hong Kong, according to Raja Mukherji, who is based in the city and is head of Asian credit research.
“Many issuers are coming to market without a deep track record or management credibility, are much less diversified, and are highly leveraged,” Mukherji wrote in a March 6 e-mail. “Pimco is carefully observing the Dim Sum market and will analyze investment opportunities based on the above key factors.”
Far East Horizon Ltd. (3360), a financial services provider that issued 1 billion yuan of Dim Sum notes at 5.75 percent in January, had long-term debt equivalent to 129 percent of its equity, according to data compiled by Bloomberg.
There are “a number of companies” in preparations for Dim Sum bond sales, which will return the demand and supply balance in the offshore market to a more normal level, Citic Securities Co. wrote in a report yesterday, without identifying the names of potential issuers. ABC International Holdings Ltd., a unit of Beijing-based Agricultural Bank of China Ltd., said last month it plans to hire more traders for yuan bonds in Hong Kong as a growing number of state-owned companies tap the market.
The yuan rose 0.02 percent to 6.2167 per dollar as of 11:20 a.m. in Shanghai, while the twelve-month non-deliverable forwards gained 0.05 percent to 6.3066 in Hong Kong. The cost of insuring China’s sovereign notes using five-year credit-default swaps fell four basis points to 62 in New York since the end of December, according to data provider CMA, which is owned by McGraw-Hill Cos. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower defaults.
There are signs that global demand for yuan-denominated assets is strengthening. The People’s Bank of China and domestic financial institutions sold a record 683.7 billion yuan to buy foreign exchange in January, official data show. The amount of yuan held outside China totals almost 900 billion yuan and the currency is expected to be fully convertible in five years, HSBC economists led by Qu Hongbin wrote in a research note received yesterday.
The average yield on non-rated Dim Sum debt has fallen 85 basis points to 4.95 percent in the past year, according to the HSBC Offshore Renminbi Bond Index. The rate on investment-grade notes dropped 20 basis points to 3.33 percent.
“We have seen better flows into offshore yuan credits both in primary allocation and secondary trading,” HSBC’s Hong Kong- based analysts Crystal Zhao and Zhang Zhiming wrote in a research note on March 7. “We remain constructive on the high- yield space as investors continue to search for yield.”
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