US Treasury rates shot to new highs for the year last week, with the 10 year Treasury closing at 1.54% on February 25, having started 2021 at 0.93%. The 10 year Treasury settled lower at 1.45% overnight on Monday, before moving higher to around 1.47% on Wednesday as the sell-off continued.
Naturally, dollar bond flow has tapered off. Bankers had been optimistic about the pipeline for new deals following the Chinese New Year break in mid-February. The holiday, which spanned a week in mainland China, caused primary issuance to slow to a trickle. The first full week after the holiday, which began on February 23, was supposed to bring a slew of fresh bonds, but that never came at the level expected.
It is the same story this week. Issuance has slowed from its peak of eight or nine deals a day from Asia ex-Japan in the first few weeks of 2021 to fewer than five a day as issuers continue to take stock of the recent uptick in market volatility.
Borrowers that need to raise funds quickly are being forced to rethink their tenor choices and accept that a premium of some sort will be necessary. One bond banker said that recent new issue concessions have been about 10bp-20bp.
The first clear sign of a possible correction came when China Aoyuan Group sold a $350m bond on February 23.
Chinese property companies had been flooding the market with well received transactions in January, and many were able to price their bonds at new lows. But when B1/B+/BB Aoyuan marketed its 5.88% 2027 bond — the first real estate trade after the Lunar New Year — investors asked for a 20bp-30bp premium to compensate for the longer tenor and low ratings. The notes, which were priced at 99.651, were down two points on Monday.
The change in market expectations may be tough for corporate treasurers to digest, but the slower pace of deal flow and demand for premium are good for Asia’s bond market.
Bankers are, of course, quick to point out that the fundamentals of the market are still good, and investors still have plenty of money to put to use. That may be true, but the fact that investors are being more pragmatic about what deals they buy and at what price is important — and helps better reflects some of the risks in the market, especially around Chinese property bonds.
It is not just Chinese real estate borrowers that are subject to premiums, but firms from the sector are the biggest borrowers in Asia, and so a good indicator of changing investor appetite.
They managed to get away with pricing deal after deal through their existing curves at the end of 2020, but that has now been called into question. The spike in volatility will likely force them rethink their funding strategy.
Cracks in the Chinese property market have also shown that investors should be critical of the companies they are investing in.
China Fortune Land Development Co has been the hardest hit in the sector recently, as it has battled ratings downgrades and defaults. Its 2022 notes were trading at 36/39 on Tuesday morning. Other low rated companies have also seen their bonds swing lower in the secondary market, as investors question their abilities to make payments.
Dollar bond issuance in Asia has been muted this week and is expected to be equally quiet next week too, not just due to concerns over rising US Treasury rates but also the reporting blackout period for companies listed in Hong Kong.
The market should embrace this pause as a chance to allow investors to digest the huge deal flow seen in January and early February, and let bond prices correct. More issuance is undoubtedly around the corner — as is a necessary pricing reset.