Across The Border | Asia junk bonds default rate to moderate amid globe easing
However, the commodities sector will continue to see high levels of default driven by overcapacity and weak demand, says Moody’s
The default rate on Asian junk bonds will moderate following global monetary easing, bringing relief to yield-seeking investors driven to high-risk debt amid record low yields for safe bonds, according to a report by Moody’s Investors Service.
However, debt issued by commodities companies - especially in the metals and mining sector - is an exception, with defaults on the rise and expected to continue.
The research report says the default rate for junk bonds - high-yield, non-investment grade bonds - issued by non-financial companies in Asia is expected to be as low as 3.3 per cent until the end of 2016. That compares with a default rate of 5.6 per cent in the 12 months to the end of June this year.
The drop is the result of the monetary easing measures adopted by major economies around the world.
The [mining] sector will remain vulnerable in the near term
Clara Lau, a Moody’s credit officer, said in the report: “Default risks will be alleviated by accommodative monetary policies employed by the central banks in Asia and globally, which will provide Asian high-yield companies with low cost funding and liquidity, thereby offsetting the impact of the low global growth outlook and the protracted challenging operating environment for commodity issuers.”
High-yield corporate bonds have been a hot investment this year. Given the extremely low or even negative yields on government bonds and other low risk fixed-income debt in many major economies, investors have poured money into junk bonds, attracted by the higher yields and the lower valuations relative to stocks.