(Bloomberg) -- Dollar bond spreads for Asia’s top-rated issuers have narrowed to a record low after a blitz of monetary and fiscal stimulus measures by Chinese policymakers boosted the appeal of the region’s debt.
The average yield premium on the Asian bonds tightened to 74.6 basis points on Wednesday, dropping under the previous low of 75.5 basis points reached in late May, according to data in a Bloomberg index stretching back to 2009. Notes of Chinese issuers are leading the moves over the last month since the People’s Bank of China rolled out steps to support banks’ lending and government leaders pledged forceful measures to bolster a stuttering economy.
The spread tightening in Asia is part of a global decline in risk premiums investors can earn from holding corporate debt, as a pivot by many central banks to shore up economic growth offers a boost to companies and their ability to service debt. Spreads on high-grade US corporate debt compressed to their lowest since 2005 earlier this month, a Bloomberg index shows, and while they’ve widened a few basis points in the meantime, investors still expect more rate cuts by the Federal Reserve through 2025 to spur demand for the additional yields on credit.
“We have two of the world’s largest economies, China and the US, both showing signs of supportive policy,” said Leonard Kwan, a portfolio manager at T. Rowe Price in Hong Kong. A firming growth outlook and monetary easing make for “a very supportive environment for credit and for spreads,” he said.
While doubts linger about the long-term impact of China’s latest stimulus measures, spreads on Chinese high-grade dollar bonds have tightened about 15 basis points so far this month. That compares with an 11 basis-point decline in yield premiums for comparable bonds from the region as a whole, Bloomberg indexes show.
“A lot of client conversations are now about China, whereas for much of this year it has been non-China,” said Goldman Sachs Group Inc. head of Asia credit strategy research Kenneth Ho in a Bloomberg TV interview earlier this month. “We’ve seen this policy put in terms of ensuring better China growth and we think to a large extent that is already reflected in the credit markets,” he said, citing tighter spreads.
Economies globally undoubtedly face risks from wars and markets are bracing for a bout of volatility from the US elections, but concerns about a near-term recession in America have retreated. The International Monetary Fund said last week it expects growth of 3.2% for the world economy next year, the same as its estimate for this year, a 0.1 percentage point decline from a July prediction.
Read also: Goldman Sachs Upgrades China Growth Forecasts on Latest Stimulus
Asian bond valuations are also benefiting from a drop-off in offshore Chinese bond issuance — compared to the busier years prior to and during the pandemic — as borrowers there focus more on cheaper funding at home. It means that a large pool of investors are chasing a smaller supply, allowing bond sellers to price more in their favor.
“It would not surprise us to see spreads push even potentially tighter into the new year if you were to get a non-disruptive election result,” said T. Rowe’s Kwan. He favors Southeast bonds and from a valuation perspective is less bullish on Indian debt after spreads tightened significantly this year.
High-grade dollar bonds from Asia have returned investors 4.2% so far this year, outperforming a gain of 2.9% on US peers, according to Bloomberg indexes. The Asian notes have also provided investors with 2.4% of excess returns over US Treasuries in the same period, the data show.
The recent rise in US Treasury yields on the back of strong US economic data may also not upend gains from Asian credit spreads, as long as the climb is “orderly,” according to Mark Reade, head of credit strategy at Mizuho Securities Asia.
“The path of least resistance for spreads is tighter, given easing financial conditions as the Fed, PBOC and many other central banks cut rates,” he said. “While the upcoming election clearly has the potential to drive volatility, in credit, we suspect that risk is partly mitigated by recent strong fund inflows.”
--With assistance from Catherine Bosley and Beth Thomas.
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