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Investment bankers in Asia are usually happy to see a spike in Treasury yields. It gives them the perfect excuse to tell clients that if they don’t issue dollar bonds now, the costs will be much higher later. That may help explain why debt sales in the US have uncannily accelerated, even as Bill Gross and Jeffrey Gundlach warn of the impending end of the 35-year old bond bull market.
Asia, however, isn’t taking its cue from the West this year. That doesn’t mean that bankers have lost their powers of persuasion: rather, it’s collateral damage stemming from China’s dominance of the market. With authorities in the region’s biggest economy focused on stemming outflows and many bureaucrats concentrating on the Lunar New Year, which falls relatively early in 2017, approvals for foreign fundraising have been hard to come by. As a result, dollar-bond issuance has been the slowest for the first 11 days of the year since 2011.
It’s a sudden hiatus after Asian issuers sold $183.5 billion in dollar notes last year — an amount surpassed only by the $190.8 billion raised in 2014. China represented 56 percent of the 2016 total, or $102.8 billion.
By no means have Chinese companies exhausted their need for cash. On the contrary, a domestic liquidity squeeze and bond market selloff have halted public corporate debt sales at home, increasing if anything the
demand for foreign cash.
Chinese companies need no convincing that it’s time to sell dollar securities. Only closed doors and the unwillingness of regulators are standing in their way. For investors, that’s positive news, at least in the short term.
The reduction of supply has translated into strong demand for the few notes on offer. Hong Kong-based New World Development Co., for instance, saw almost $5 of interest for every $1 of debt it was offering yesterday, allowing the property company to reduce the yield paid on its 10-year bonds to 4.75 percent from an initial target of 5.25 percent.
The strength of demand has also lowered the premium Asian dollar bonds pay over U.S. Treasuries by five basis points this year, leaving it only seven away from the all-time low touched in September.
The new year joy could quickly turn into pain. Once Chinese authorities get back to work in mid-February, they’ll have every incentive to allow companies to raise debt offshore and a long list of interested parties. That flood of sales will hit international markets just as Donald Trump, who has criticized China’s trade policies and threatened to brand the country a currency manipulator, is settling into the Oval Office.
It doesn’t take a crystal ball to foresee the outcome. Those record-tight spreads could vanish in a fortnight. With Treasury yields heading still higher, a selloff may ensue, making Asian bonds very unappetizing.
This time, at least, the region’s companies might want to listen to their bankers.
— Bloomberg
Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket