Pimco warns of credit risks as Asia bond sales at record

Bloomberg

Raja Mukherji, head of Asia credit research at Pacific Investment Management Co., has turned less bullish on the region’s dollar bond market, as record offerings raise the risks presented by weaker borrowers.
“We don’t have a table-pounding buy on Asian credit today like we did last year, especially not for high-yield bonds,’’ said Mukherji. Asia dollar bond valuations are “tight” and investors are focused more on yields than fundamentals. “That’s where I see a lot of risk,” he said.
Borrowers from Asia excluding Japan have raised a record $106.4 billion this year, more than double the $49.5 billion during the same period last year. Average yield premiums for the region’s corporate junk securities have fallen 91 basis points since Dec. 31, near the lowest level in nine years, according to Bank of America Merrill Lynch indexes.
Negative or near record low interest rates have prompted investors from Japan to China to buy overseas bonds. The region’s millionaires are pushing deeper into exotic securities, buying everything from notes linked to European soccer teams to high-yielding wealth management products on leverage. With retirees hunting for yield, Mukherji warns investors are not getting sufficiently paid for some of the risks.
“It gets risky when you maintain your yield but the credit quality slips under you,” he said. “A lot of lower quality credits are coming to the offshore market and getting bought because they offer a high yield.”
Guggenheim Partners’s chief investment officer Scott Minerd said his firm is “trying to lean against” clients rushing into US corporate debt. “To get them to understand that we’re late in economic expansion, credit spreads are extremely tight, especially in high-grade corporate debt and high yield,” he said at a conference in Beverly Hills, California.
As defaults rise in China’s local debt market, weaker companies are being forced offshore. Junk borrowers including China Evergrande Group and China SCE Property Holdings Ltd. are among those that sold offshore debt this year.
Mukherji said that he sees “pockets of opportunity” in Asia’s investment-grade dollar bonds, including AA and single A credits, which offer a pickup in yield over their US peers. He is focused on high-quality credit with shorter duration risk and likes notes from the oil and gas, utilities and infrastructure, as well as the Internet sectors.
As the region’s aging population looks to buy products to meet their retirement goals, the hunt for yield shows no signs of abating. “You have private banks and sovereign wealth funds all looking for higher yielding US dollar assets,” said Mukherji.