A rate-cutting Federal Reserve, fading recession concerns and benign inflationary environment combined to boost Asian G3 bond issuance volumes to a record high this year, a phenomenon unlikely to be repeated next year.
In 2020, issuer needs are seen moderating, and pricing pressures would mean the US central bank is more likely to hold or even raise rates.
In the year to date, bonds sold by Asia ex-Japan issuers and denominated in US dollars, euros and yen aggregated $370.1 billion topping 2017’s peak of $361.2 billion, according to data from Dealogic.
The issuance was driven by the strong appetite for Asian credit as the rate environment remained easy and issuers took advantage of low levels of interest to reduce their funding costs. On a total returns basis, Asian credit has returned 11-12% depending on the bond’s risk profile.
“Most of the performance is coming from rates – for example, the 100 basis point rally would alone give a 5-year bond a 4%+ return. Also, there has been a squeeze in credit spreads,” said Rogerio Bernardo, Head of global syndicate, DBS referring to the decline in the US Treasury yields, a benchmark for credit valuation.
The 10-year US government bond had dropped 122 basis points this year at its lowest in September. Currently, at 1.88%, it is 80 basis points lower than at the start of the year.
“The performance in 2020 will be slightly different as the Fed will not be cutting and inflation pressures will start to build,” said DBS’s Bernardo.
Nomura International bond issuance to be lower in 2020 and credit spreads to compress only modestly.
“This (lower issuance) is driven by tighter issuance regulations for Chinese property developers, the diversion of Chinese banks’ capital raising to the onshore market given lower funding costs there, and lower capex requirements for many corporates,” it said in a report.
“Given higher redemptions of USD224bn next year (2019: USD186bn), net USD bond supply should decrease sharply to ~USD45bn next year versus ~USD115bn in 2019.”
Chinese issuance, particularly from the property sector, has been the main driver of Asian bond market supplies in the past decade. In recent months, Beijing has been restraining inflow of excess liquidity into property developers’ hands to put a cap on land acquisition costs, which would raise property prices. But authorities are unlikely to choke funds availability because overall stability in the property sector is still of paramount importance to the world’s second-largest economy.
“The authorities have managed the demand and supply side of the property market well in 2019, as evidenced by stability in residential prices. Significant changes in policy direction or excessive tightening are hence unlikely, in our view,” said a UBS CIO note.
“Some liquidity will eventually flow back into the property sector despite negative headline news on governments’ efforts to control prices. We recommend investors to ride the sector consolidation wave and buy the solid BB/B names with good liquidity for carry during this credit tightening cycle.”
HSBC is also overweight on China property after changing its recommendation from neutral this month.
“We expect the government to gradually loosen its policy on home purchase restrictions and/or price caps, and also believe that better onshore liquidity will improve market access for developers,” it said in a report.
Credit Suisse analysts say the Chinese property is a preferred sector, with revenue and earnings expected to grow by 21% and 18% in 2020, respectively.
“We expect authorities to support real estate investment growth in 2020. Some local governments have already loosened demand-curbing measures with the relaxation of Hukou policy. We expect more in 1H 2020,” it said in a report.
The optimism has been sparked by the latest round of government measures to promote social mobility by reforming the hukou system. Guidelines issued by the State Council said restrictions on residence registration will be completely lifted for cities with a residential population of less than three million in urban areas. Conditions for residential settlement will be relaxed for large cities with a residential population of three million to five million in urban areas. These changes follow President’s Xi Jinping’s article earlier this month which said: “The structure of economic development is undergoing profound changes, with central cities and city clusters becoming the major vessels for development.”
“China Property USD bond has performed with flying colours and outdone other sectors in 2019,” said BOC International in a research note but said it was more picky for the year ahead. “In terms of credit selection, we prefer Chinese property credits with considerable size, strong execution ability and healthy balance sheet for carry.