Horn of plenty leaves investors on horns of a dilemma

The Asian dollar bond market has been a cornucopia for issuers this year. Amid plentiful liquidity, it’s easy to lose sight of just how little reward there is now for all the risks investors are being asked to accept.
Less than seven months into 2017, asset managers and private-bank clients have written checks for $175 billion to companies and governments from the region. At this pace, the 2014 record for Asian dollar debt issuance — $190 billion — may be broken with a quarter to spare.
The milestone could be reached even sooner if China Evergrande Group decides to reclaim the title of the nation’s most indebted real-estate developer from Sunac China Holdings Ltd. Evergrande, the most aggressive Asian issuer of 2017, has already scooped up more than $9 billion from six offers.
When it comes to performance, Asians aren’t the superstars this year. Both Mexico and Brazil have given 8 percent-plus returns so far. Still, Indonesia isn’t far behind, and the 4.6 percent return on Indian bonds included in the Bloomberg Barclays Emerging Market Index is not to be scoffed at.
Besides, as Bank of Singapore’s fixed-income strategist Todd Schubert notes, momentum in Latin America is fading. At 5.6 years, the region’s bonds have one year more in duration risk than their Asian peers. If investors decide to shed some of that exposure, they might be even more inclined to buy Asian dollar debt. As a result, their compensation, already down from a year ago, might fall further.
Should investors keep dancing to the music of easy money or look for a chair?
The secondary market reveals very little nervousness. A Gadfly analysis of all Asian dollar bonds sold this year shows that market prices are higher than issue prices (or yields are lower) for both the tail end of investment-grade securities and the top of the crop among junk-rated notes. It’s only B-graded issues that have sold off a bit.
Even then, chills haven’t endured. Take Evergrande. An eight-year note it sold in June was oversubscribed, but the bond tanked in the secondary market. Fast forward a month, though, and whatever concerns investors had about the developer’s desperation to raise money seem to have
disappeared.
The good times won’t last forever. But while the party is on, issuers want to get one more deal done. Chinese property companies, unsure whether they’ll be allowed to raise more money overseas, are selling notes maturing in less than a year to bypass registration with the National Development and Reform Commission. And India’s Greenko Energy Holdings raised $1 billion this week, becoming the largest corporate green bond issuer from Asia.
Investors are perched on the horns of a dilemma. This year’s good fortune is due in large measure to Donald Trump. The president’s failure to whip up growth and inflation has kept a lid on US interest rates, and halted last year’s appreciation of the dollar. That has kept capital busy chasing yields in emerging markets. Until there’s an abrupt change, spreads won’t blow out.
Sooner or later, though, Asia’s horn of plenty will get lighter. You have to hope it won’t suddenly be empty.

— Bloomberg