Trade war widens spreads on Asian dollar bonds

Hong Kong

THE escalating trade war between the United States and China is exposing cracks in Asia's booming dollar bond market, which has seen record issuances 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 stabilise 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.

Ek Pon Tay, a portfolio manager for emerging-market fixed-income at BNP Paribas Asset Management, said: "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."

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, said Pheona Tsang, chief investment officer of fixed income at BEA Union Investment Management.

The sharp increase in trade hostilities "caught investors by surprise", but investors need to ask themselves whether such a dramatic repricing is warranted, said 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," he said. BLOOMBERG