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Trade war turns up heat on Asia dollar bonds as spreads surge

[HONG KONG] The escalating trade war between the US and China is exposing cracks in Asia's booming dollar bond market, which has seen record issuance and handed investors big returns this year.

Spreads on emerging-market Asian dollar bonds, in the three days through Monday, widened by the most since August 2015 after a weakening of the yuan led the US to label China a foreign-exchange manipulator. China took steps to stabilize its currency on Tuesday, but dollar bond premiums widened further in afternoon Asia trading.

Emerging Asian currencies have slid this week against the dollar amid a ratcheting up in the trade spat, and that has the potential to put pressure on repayments by some issuers. Investors in the region's dollar bonds are sitting on returns of 9.3 per cent so far this year, the most since 2010, and face increased pressure to lock in gains.

"Indonesia and China corporates that are exposed to currency risk, where their debt servicing costs are in dollars and unhedged versus earnings in local currency, are expected to under-perform," said Ek Pon Tay, a portfolio manager for emerging-market fixed-income at BNP Paribas Asset Management.

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In Asia, companies from an Indonesian textile firm to a Chinese commodities trader have already stumbled under debt loads. China's onshore defaults hit a four-month high in July, amid a slowing economy and rising risk aversion. Deal flow in the Asia dollar primary market stalled this week amid global market volatility.

The new US tariffs aren't good for risk assets and there could be a further weakening in emerging-market currencies and Asian dollar bonds because of heightening tensions, according to Pheona Tsang, chief investment officer of fixed income at BEA Union Investment Management.

The sharp increase in trade hostilities have "caught investors by surprise" but investors need to ask themselves whether such a dramatic repricing is warranted, according to Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard Investments.

"Investors now face the challenging task of trying to determine whether President Trump's political calculus is driven more by maintaining market stability or further advancing anti-China trade policies," Mr Lukaszewski said.