Default on Chinese bonds is on the rise, all but arousing concerns among bond investors. Demand for such bonds has taken a significant hit in the wake of the U.S government hitting a number of state firms with sanctions. November saw the lowest number of issued bonds in seven months by Chinese companies, down by 52% from October.
Chinese Bond Sell-Off
The decline in Chinese bond demand is accelerating, considering that just $660 million was sold in the last week of November, the smallest amount since May. The onshore credit market is in trouble conversely sending yields higher. The U.S government has already hit a state-owned coal producer and prominent chipmaker with sanctions.
Immediate reports indicate that the Trump administration is planning to add Semiconductor Manufacturing International Corp and China National Offshore Oil Corp into the list of companies blocked to do business in the U.S, the result has been investors shunning the Chinese bond markets.
In return, other bonds are benefiting from the Chinese bond market woes. As the Yield on Chinese dollar bonds widened by 12 basis points over treasuries, South Korean dollar bonds tightened six basis points. The U.S bond market is also on a roll as investors pile back into funds that buy corporate debt.
Soaring U.S Bonds
The prospect of a coronavirus vaccine and its potential impact has lifted the fortunes of some of the hardest-hit companies. In the week ending November 11, 2020, U.S high yield bonds took in $3.3 billion, reversing nearly $3 billion withdrawn the previous week.
Likewise, investors are increasingly betting on U.S junk bonds, expecting most of the companies hard hit by the pandemic will stay away from bankruptcy. Bonds issued by low rated businesses have rallied by more than 7% over the past month, with triple c bonds showing the greatest leap.
The value of corporate bonds plummeted to record lows early in the year as countries imposed lockdowns to combat the coronavirus’s spread. Fast forward, countries have come to terms with better ways to manage the pandemic with highly effective vaccine on course to go into distribution soon.
The more optimistic outlook due to the COVID-19 vaccine has helped bring borrowing costs in the bond markets lower. In return, companies are increasingly venturing into the bond markets to take advantage of the low-interest rates and raise additional capital.
The S&P 500 Global Ratings remains bullish about prospects in the bond markets, with the default rate expected to drop from 12.5% by next march to stand at 9% by next September. However, investors remain wary about being bullish in the bond markets.
Facing a decline in profits, most companies have rushed to issue debt since March liquidation. The increased leverage could be problematic in case of a future downturn, something that could hurt investors a great deal.
With the prospect of default rates edging higher even with the recent vaccine news, investors need to remain cautious. Conversely, a rapid decline in yields in the high-yield bond market might not be enough to compensate investors.