By Andrew Galbraith
SHANGHAI (Reuters) – Chinese high-yield dollar debt spreads have hit their widest since the peak of property developer China Evergrande Group’s liquidity crisis last November, as the Russia-Ukraine conflict prompts a global flight to safety.
Geopolitical worries are further squeezing high-yield dollar issuers as more defaults and downgrades of Chinese property developers signal continued stress in the sector.
The option-adjusted spread on Chinese high-yield corporate dollar debt was last at 2,619 basis points, its widest since Nov. 11.
Manulife Investment Management portfolio managers Paula Chan and Isaac Meng said that the negative sentiment and high volatility are likely to continue for now.
“We believe in taking a more defensive approach to portfolios with exposure to China USD credit. We have also been less positive on higher beta (risk-sensitive) names and more positive on higher-quality credits since the lead up to the current crisis,” they said in a note.
“We are less positive on selected property names in the China USD credit space in recent weeks due to ongoing volatility in the sector.”
Clarence Tam, fixed income portfolio manager at Avenue Asset Management said developers’ margins remain under heavy pressure from falling sales and government curbs, despite regional policy loosening.
Poor fundamentals prompting rating downgrades would raise the difficulty of refinancing, leading to tighter liquidity and worse fundamentals, he said.
“We think the downward spiral will continue … and spread to some ex-BB names.”
Even Chinese government bonds have suffered from rising risk aversion, with foreign investors cutting holdings at the fastest pace in three years in February.
But Chan and Meng said a rebounding economy and more easing would likely attract more inflows.
“We maintain our view that the China fixed income asset class will continue to offer global investors diversification benefits and the potential to outperform other DM and EM bond segments this year.”
(Reporting by Andrew Galbraith; editing by Uttaresh.V)
