Evaporating Liquidity in USD China HY Bond Market
A Falling Knife Situation
There is a saying that one should not try to catch a falling knife. We look now at very high risk frontier market, and we take it at a very difficult time. The China HY Markets sees many bonds that were issues around 5% to 6% last year trading above 10% now (typical for BB rated bonds for now). Liquidity has evaporated and some of the riskier BB and below bonds trade between 12% and 18%. This contrasts with a yield of 5% on CDX NA HY B.
Markets are entering that reflexive phase where investors are running away, scared of an investors run.
High Expectations and the ramp up of bond yields
Early this year, the NDRC gave approval to property developers to issue oversea bonds to boost growth.
This led to a spate of new issuance from January to May 2018. New issue fatigue slowed demand Asia HY, and that index yield has slowly climbed from 6.5% to 8%.
Captured from Yahoo Finance. For reference, the JNK ETF is a 50/50 mix of BB and B US bonds, and now yields 5%. It dividend halved since 2010, meaning that it used to yield above 10%.
May and June Events
The China USD HY index yield climbed from 8% to 10% between May and July following more negative news:
- unexpeccted default of CERCG (China Energy Reserve Chemical Group) on 250m bonds due 28 May
- NDRC, China's economic planner, halted financing quotas for solar projects due to overcapacity
- NDRC asked developpers to issue only to repay bonds, not to develop new projects
- Wuzhou Intl defaulted on Rmb 1b of demestic bond and USD300m issue
- trade war tweets
Stampede and negative perception
The market appears to be very shallow and sensitive to negative news. While the RMB market was also affected, there is fear of currency volatility, which would cause the debt burden if USD appreciates against the RMB.
While much of the pundits attention is on market direction and sensational events, it pays now for investors that are not bound by mark to market to focus on yield and ability to pay...