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Big-time investors are snapping up China's junk bonds

Yen Nee Lee
  • Chinese property developers dominated the issuance of U.S. dollar-denominated junk bonds in the first three months of 2019, according to a report by research firm CreditSights.
  • In a sign of greater risk appetite by investors this year, many high-yield bonds issued by Chinese developers in the first quarter come with longer maturities, CreditSights said.
  • BlackRock, Pimco and UBS are among investors who say high-yield bonds by Chinese property developers are an attractive investment this year.

Global investors are snapping up high-risk bonds in Asia — especially those offered by China property developers — in a sign that investors are increasingly more willing to take bigger bets.

Those debt securities, known as high-yield or junk bonds, fell out of favor for much of last year amid an escalating tariff fight between Washington and Beijing . China's deleveraging campaign and the strengthening U.S. dollar did not help either.

Junk bonds are non-investment grade debt securities that carry a high default risk, and therefore, usually come with higher interest rates to compensate for that risk. Such instruments carry a credit rating of BB+ or lower by Fitch and Standard and Poor's, or Ba1 or below by Moody's. They are also called high-yield bonds.

But for some investors, those risks may have subsided and the business climate appears to have improved.

"Our biggest call this year has been Asian high-yield (bonds) and, particularly, Chinese property securities. We still think they've got further to perform," Hayden Briscoe, head of Asia Pacific fixed income at UBS UBSG-CH Asset Management, told CNBC's "Street Signs" last month.

"We think the underlying dynamics are very, very different to last year when (we were) under pressure, in particular because the deleveraging phase in China is over," he added.

UBS is not the only money manager that has turned in favor of high-yield bonds issued by Chinese property developers. Neeraj Seth, head of Asian credit at BlackRock BLK , told CNBC's "Squawk Box" in early April that "we've been positive on Chinese real estate high-yield debt for a good number of months now."

More risk-taking

Chinese property developers dominated the issuance of U.S. dollar-denominated junk bonds in the first three months of 2019, according to research firm CreditSights. In an April report, the firm said that an "overwhelming bulk of new issuance" has come from Chinese high-yield real estate developers.

In total, Asia saw issuance of around $20 billion in U.S. dollar-denominated high-yield bonds in the first quarter — more than double that the same period last year — with 80 percent coming out of Greater China, the report said.

In a sign that investors have a greater risk appetite this year, many high-yield bonds issued by Chinese developers in the first quarter come with two- to three-year maturities — longer than the less than one-year notes commonly seen a year ago, according to CreditSights.

Investors such as BlackRock found that the overall economic backdrop has turned in favor of Asian bonds, said Seth.

He noted that the United States Federal Reserve's recent move to stop raising interest rates is set to keep the greenback stable against Asian currencies, and several Asian governments and central banks are now providing more support to their respective economies. Such an environment is typically favorable for investments and doesn't threaten companies' ability to finance their debt in U.S. dollar.

China's support

China's economic planner, the National Development and Reform Commission, last year eased rules specifying how companies are allowed to use their bond proceeds. The move would encourage more Chinese firms to raise funds from the bond market, CreditSights said.

Relaxing those rules was part of Beijing's efforts to support its slowing economy . Before that, earlier initiatives to wean the economy off a reliance on excessive debt had cut off several financing options for Chinese firms – and property developers were among those most affected.

There could be even more measures aimed at relieving pressures on the property market in China, according to investment management firm Pimco. The bond giant is also bullish on high-yield debt by certain large Chinese property developers and said they could be an attractive investment opportunity for 2019.

"In light of external trade pressures, the government will likely seek to stimulate the economy by boosting consumption and relaxing property market measures," portfolio managers from Pimco wrote in a March report.

"Potential policy levers include easing credit conditions for developers, relaxing the price cap, partial relaxation of home purchase restrictions, lower mortgage rates, and better availability of mortgage loan quotas. In recent months, we have witnessed emerging signs of gradual relaxation at the local government level," they added.

Clarification: This report has been updated to reflect that Neeraj Seth is head of Asian credit at BlackRock.

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