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Asian High Yield Bond

The gap between spreads on Asia’s lowest investment-grade bonds and its top high-yield notes widened to the most in a year, signaling junk debt may rally after investors dumped it amid Europe’s fiscal crisis.

The difference between bonds ranked at least Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s and those one grade lower at Ba1 or BB+ climbed to 2.8 percentage points after rising to as much as 3.15 percentage points last month, Bank of America Merrill Lynch data show. It is almost five times the 0.61 percentage point gap of June 2009 and 1.1 percentage points above the one-year average.

The table below compare Asian High Yield Bond with Euro High Yield and US High Yield.

Asian High Yield

Euro High Yield

US High Yield

Market Size

60 bn

160 bn

839 bn

No. of Issuers

72

258

1965

Subordination

Senior: 77.4%

Subordinated: 22.6%

Senior: 75.7%

Subordinated: 24.3%

Senior: 84.6%

Subordinated: 15.4%

Average Ratings

B1

BB3

B1

Source: FIL Limited, Bloomberg, BofA Merrill Lynch Indices 31 Mar 2010.

Asian HY return correlations vs.

Asian Investment Grade

0.75

Global Govt. Bonds

0.39

Asian Govt. Bonds

0.78

EUR Govt. Bonds

-0.04

Asian Equities

0.60

US Govt. Bonds

-0.07

EUR HY

0.7

EUR Equities

0.43

US HY

0.7

US Equities

0.51

From the above tables, we may observed the following points:

  1. Asian High Yield market is small as it is relatively new compare to that of US and Euro.
  2. Asian High Yield rating is comparable to US.
  3. Asian High Yield return is lowly correlated to Global Government Bond, Euro Government Bond, US Government Bond, Asian Equities, EUR equities and US Equities.

On 13 June 2010, Moody’s indicated that the Asia-Pacific region’s corporate default rate will “drop sharply” to 3.5% this year from 17% in 2009 as the region’s economies and credit markets strengthen. It appears that the spread between BBB and BB credits will narrow again.

From what I have gathered, Asian High Yield exhibits the following characteristics:

  1. It is not as liquid as US. This implied if the crisis were to 'kick-in', bond price will greatly impact.
  2. Unless the bond default, due to illiquid, the fund manager is likely to hold the bond till maturity.

Reference: Bloomberg, 20100620, “Asia Company Bond Spread Gap Shows Battered Junk Debt May be Set to Rally”.