China junk-bond rally needs more catalysts to back 80 per cent surge as Value Partners looks to diversify from property debt
- Hong Kong-based fund manager will hold off from adding more property bonds into some of its funds, managing director says
- Chinese high-yield bonds have gained 80 per cent from the low in early November as spreads narrowed by 13 percentage points: ICE BofA Index
Value Partners, one of the biggest local investors in Chinese high-yield bonds, said the 80 per cent rally in the market for the riskiest corporate debt in the region has likely stalled for now. New catalysts are needed to justify the sentiment-driven recovery, a top executive said.
The money manager will refrain from chasing the market, after reloading some of its fixed-income funds with securities issued by Chinese developers during the rally from early November on the back of Beijing’s zero-Covid pivot, according to Ricky Tang, managing director and co-head of client portfolio management.
“We may not increase our holding at current levels because the spread has already tightened and prices of many [better quality] bonds have jumped [a lot],” he said in an interview. “The opportunities have already passed” to put more money into the securities, he added.
Property bonds made up almost 40 per cent of the fund’s holdings at end-January, versus less than 20 per cent in October, Hong Kong-based Tang said. The team will instead diversify into sectors such as consumer, industrial, internet and financial companies that will benefit from China’s recovery momentum, he added.
China’s economic reopening came sooner than most economists predicted, paying off bets in stocks and bonds. Beijing also eased access to financing for some cash-strapped developers via its “three-arrow” initiatives. Chinese high-yield bonds, one of the riskiest securities as the Evergrande crisis and defaults deepened, returned 80 per cent from a multi-year low in late October, according to an ICE BofA index.
The spread or risk premium over US Treasuries - the gold standard in global bonds - narrowed to 1,290 basis points on February 28 from 2,623 basis points on November 1, according to the index, which tracks 68 Chinese bonds worth US$30 billion. The spread has stabilised at current levels since January.
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Healthier property companies led the rally. Country Garden’s bonds due January 2024 were indicated at 87.5 cents on a dollar on Tuesday while Dalian Wanda Commercial Management’s notes due April 17, 2023 recovered from a slump to trade near par.