Expect an active year for corporate bonds in Asia
DEMAND FOR ASIAN credit was on fire in the first quarter of this year, had a brief blip in April, and has since picked up again. The fundamentals remain positive, bond analysts say.
'The corporate bond sector has been doing well this year, except for a soft patch in April and May due to the downgrading of Ford Motor to non-investment grade,' said Tee Choon-hong, Deutsche Bank managing director of corporate coverage group for Asia.
The automotive bond sector accounts for about 9 per cent of all outstanding corporate bonds in the United States, so the effect of Ford Motor's credit downgrade was considerable and sent ripples through credit markets worldwide.
Mr Tee said that with interest rates still at cyclical lows, corporate Asia was eager to issue more bonds to finance capital expenditure, refinancing or merger and acquisition activities.
'We anticipate 2005 to be an active year for corporate bonds in Asia. Flexibility in the yuan exchange rate will encourage more issuers to look at US dollar issuance from Asia,' Mr Tee said.
'Meanwhile, high oil prices might affect economic growth globally, imposing downward pressure on long-term yields, if the market expects this to have a dampening effect on economic growth and, therefore, on actual inflation or its expectation. All else being equal, this is essentially good news for the bond market.'
While overall sentiment in the Asian corporate bond market is positive, one question still vexes bond analysts: how much more can the credit spread tighten?
The credit spread - the difference between the corporate bond yield and government bond yield - reflects how well investors are compensated for taking on the lending risk of a corporate bond.
Pradeep Mohinani, senior vice-president in high-grade credit research at Lehman Brothers, said credit spreads would continue to tighten.
'At the beginning of June, we were calling for 10 basis points of tightening in the high-grade spread and 20 basis points in the high-yield spread through the second half of 2005. Two months have gone by and Asian high-grade is five basis points tighter and high-yield is 20 basis points tighter,' he said.
'While high-grade should grind tighter, we believe most of the tightening will come from South Korea, Hong Kong, Malaysia and India. The performance in high-yield depends on the developments in the Philippines.'