Asian High-Grade Bonds Are Staying Below Par in Pessimistic Sign

(Bloomberg) -- The fallout in Asia from rising risk aversion in emerging markets is spreading beyond junk bonds, causing even high-grade corporate notes to fall below par.

The average price for investment-grade dollar securities in the region has stayed below 100 cents on the dollar since early April, an ICE BofAML index shows, amid higher U.S. interest rates, heightened default risk in China and turmoil in Turkey. That’s a longer period below par than the stretches that preceded debt market crashes during financial crises in 2008 and 1997.

The average price was 98.94 cents as of Aug. 17, according to the index. During the global financial crisis, prices moved below and above par for about three months before tumbling to a low of 83.1 in October 2008. Prices moved similarly in September and October 1997 before the Asia crisis dragged them to as low as 75.3 the following year.

The drop in high-grade bonds below par price underscores the debt market’s pessimism since the notes’ investment-grade ratings are meant to indicate that they are relatively safe to hold and that issuers will likely repay them. The bearishness of the market may represent a reaction to years of super-loose monetary policy worldwide.

“Most of the bonds were issued in a period of historically low rates, hence I could imagine that it would not take much of a rise in risk aversion to make many fall below par,” said Charles Macgregor, head of Asia at Lucror Analytics in Singapore. “This may just be a technical issue related to the wider emerging-market situation, unless of course the trade war really turns nasty and gets out of hand."

Some of the flash points are yet to play out, chiefly the tariff spat between the U.S. and China and the contagion risk from Turkish markets. A trade war is now regarded by money managers as the biggest “tail risk” in the latest survey by Bank of America earlier this month. Cash levels are up, while allocation to bonds fell for the first time in seven months, according to the poll.

2018-08-20 02:37:28.123 GMT

By David Yong