Asia's speculative-grade dollar debt has climbed 4.3% year to date, beating the 1.8% gain in US junk and outperforming about two dozen flagship bond gauges tracked by Bloomberg. In the past month, the lead has expanded as Chinese and US benchmark yields diverged to a record-wide spread. At the same time, credit risk premiums for Asia high yield tightened to an all-time low last week.
The month-to-date picture is choppier: Chinese junk dollar notes are up 0.2%, while Asia high yield overall has slipped 0.4%. Even so, those results stack up better than many fixed income categories where losses have deepened, with floating-rate leveraged loans standing out as September's leader.
Gains in battered issuers - among them Hong Kong developer New World Development Co. - have also boosted returns.
The core story is better fundamentals. China's borrowing costs are hovering near historic lows and the region's growth profile is stronger, which together have translated into fewer defaults. According to Moody's Ratings, within its coverage universe the US logged 43 corporate issuer defaults through July, Europe, the Middle East and Africa recorded 20, and Asia Pacific saw only one in the same timeframe.
Commenting on the market, Mel Siew - who leads Asia public credit at Muzinich & Co. - said, "The vast majority of high-yield issuers in Asia are also able to access local currency funding that is comparable or cheaper than offshore US dollar funding." He added, "The current level of credit spreads does require investors to remain vigilant."
Supply has also been a tailwind. Asia has issued less junk debt than other regions, though activity is showing early signs of life from a low base. Asia ex-Japan dollar sales from non-financial high-yield issuers are up about 20% year to date to roughly $12 billion versus a year earlier, compared with more than $220 billion of US high-yield offerings.
Behind the thin pipeline: the shakeout in China's housing market and the retreat of developers that once dominated issuance, selling over $50 billion of high-yield bonds at the 2019 peak. Today, even lower-rated Chinese companies can print shorter-dated local-currency bonds at about 1.7%, reflecting the country's deflationary backdrop. Japan is also taking a bigger slice of the speculative-grade pie, and SoftBank Group Corp. was said last month by people familiar to be lining up a debt offering of between $10 billion and $20 billion.
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At UOB Asset Management, Melvin Chan serves as director of fixed income for Asia and said, "Investors may begin migrating up the credit curve, favoring higher-rated credits where yields remain attractive without requiring them to assume the same level of default risk."
There are real headwinds. A Fed rate increase later this week looks more likely, while the conflict in the Middle East has lifted oil prices. Worries about rekindled inflation have already pushed a growing share of global bonds into the red.
If US yields rise further and the Fed tightens, non-Chinese Asian central banks would likely face pressure to lift rates to stem outflows, increasing corporate borrowing costs. Australia, where policy rates top those in the US, offers a cautionary note: the collapse of Australian builder Bathla Group could be an early sign of broader stress in such markets.
"You could start seeing the high-yield market really picking up over the next year" with issuance in Asia, provided fundamentals remain intact, according to Rishi Jalan, who leads Asia-Pacific debt capital markets at Citigroup Inc. "Tech and data centers could be a good area where you see high-yield volume."
Some see more room to run. Dhiraj Bajaj - chief investment officer at Lombard Odier Investment Managers with responsibility for Asia fixed income and equities - said, "We continue to project high single-digit returns for this year and the coming years given ample opportunity." "Most Asia high-yield investors are perhaps too cautious and are sticking to long-established credits, which leads to a lot of value still available."
Asia's junk bond rally has been built on unusually cheap funding in China, improving credit metrics, and scarce supply, with credit spreads hitting record tights last week. The flip side is clear too: a hawkish Fed, pricier oil, and policy tightening outside China could raise financing costs and test weaker borrowers.
If you follow this market, watch where issuers fund themselves, how new supply evolves, and whether defaults stay low. That mix will tell you whether today's edge is a durable trend or a good run in a tricky year.
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