Asia investment grade bond volume looking flat for the year

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Asia’s investment grade debt sales are starting this year off more slowly than a record 2012, and total volume is expected to end flat with lower returns, market participants told dealReporter.

‘’Investors have to moderate their expectations of returns from fixed income versus 2012 but there are still good reasons to believe that the market will be reasonably well supported throughout the year,” one bond investor said. “Asian IG benefits form a less volatile profile as investors consider the relative valuation benefits of high yield versus equities.”

As of 22 February, USD 10.13bn had been raised in the investment grade bond market excluding Japan, according to data provided by the US-based ratings agency Standard & Poor’s. That’s down 32% from this time last year when USD 14.79bn had been raised.

Volume is expected to gain momentum in the first half on the back of as much as USD 40bn in coupon payments and maturities, the bond investor said. He expects the investment grade financial sector, except for Korean banks, resource companies and property to outperform.

In the banking sector, tier 2 investments look better than tier 1 for some investors. “It’s hard to find the old style T1, as they are trading very tight,” another bond investor said. “T2 has the liquidity and better returns.”

The largest deal so far this year came from Thai Oil in January when it raised USD 982m, according to S&P. The ten-year tranche of that sale priced at 185 basis points over comparable US Treasurys, and was trading at 157.4 basis points Tuesday afternoon. It yields 3.586%.

Chinese real estate developer Yuexiu Property raised USD 847m also in January. The ten-year tranche was priced at 275 basis points over comparable US Treasurys and was trading at 284.1 Tuesday. It yields 4.696%. Malaysia’s Sime Darby raised USD 800m in January. The ten-year tranche was priced at 145 basis points over and was trading at 138.1 basis points over Tuesday. It yields 3.238%.

Temasek Holdings’ USD 1.7bn bond sale in July 2012 is still widely considered the gold standard for large regional deals. The sovereign wealth fund sold 10.5 year debt at 100 basis points over US Treasurys, and those were trading Tuesday afternoon at 96.55. It yields 2.776%.

The JPMorgan Asia Credit Index Investment Grade Total Return Index was at 159.78 Tuesday afternoon, around the level it started the year at.

Some investment bank credit analysts see total investment grade debt returns as high as 5% this year, while others think that number sits around 3-4%. Investors this news service spoke to saw a median 4% as a likely overall return. In comparison, 2012 saw returns of over 5%.

If risk appetite increases significantly and US Treasuries sold off then capital values would be at risk and put a further dent in overall returns relative to last year, the second bond investor said.

In Southeast Asia, Malaysia, Singapore, Indonesia and Thailand, are expected to perform well, due to continued regional growth. The first bond investor said the Philippines may go investment grade from one ratings agency, so volume from there may rise.

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