After a blockbuster 2017, the stars seemed aligned for another strong year for Asia’s dollar-bond market in 2018. Then the trade-war and a record spate of Chinese defaults intervened, contributing to the worst sell-off in a decade.
JPMorgan Chase & Co. and Bank of America Corp. were among those at the start of the year anticipating lower premiums for corporate debt, amid a solid global economic outlook and continued historically low interest rates. Sharper-than-expected hits from Federal Reserve tightening and China’s deleveraging campaign, along with the blow to sentiment from trade tensions, sent spreads surging 109 basis points to the highest in about three years.
“Rising U.S. rates, weakness in the RMB versus the dollar, EM concerns spilling over and trade war tensions all contributed to this shift in investor sentiment” for Asian high-yield bonds, Goldman Sachs Group Inc. strategists including Kenneth Ho wrote in their 2019 outlook. “We view the key reasons for the underperformance are tighter credit conditions in China and rising onshore defaults.”
Asia’s investment-grade bonds handed investors a 1.4 percent loss since the start of the year. That left even Goldman’s forecast of a zero percent return looking too optimistic.
The asset class is just one of countless that are heading for a down year, with the broadest losses in more than a century by one measure. Some 89 percent of assets have handed investor losses, Deutsche Bank AG calculated last month.
Some, including analysts at Australia & New Zealand Banking Group Ltd. and Morgan Stanley, did anticipate a more challenging environment for Asian bonds in 2018. Both those teams advised underweighting the securities of China property companies. Borrowing costs in dollars for China’s high-yield issuers, most of whom are property developers, almost doubled this year to 11 percent, the highest in about four years, ICE BofAML indexes show.