China junk dollar bond prices swing from record low to longest winning streak

CHINESE high-yield dollar bonds are on a record winning streak, as efforts to buttress the ailing property sector and the government scrapping its zero-Covid policy have boosted the country’s economic prospects.

A Bloomberg index showed that prices have climbed for 12 consecutive weeks, one week more than a streak in 2019. The average level in China’s developer-dominated junk market rocketed to its highest level in a year last Friday (Jan 27) at US$0.787, bouncing back from a record low of US$0.493 on the dollar on Nov 3, 2022.

Such bonds rose as much as US$0.02 on Monday morning, according to credit traders led by Country Garden Holdings.

Zerlina Zeng, senior credit analyst at CreditSights, said more gains could be in the offing as the high-yield market is “still trading wide compared to their pre-Covid levels and (investor) position is very light”. She added that “any positive surprise could continue to push prices higher, especially when global funds return to the China credit space”.

The sharp reversal for Chinese junk dollar bonds has made it the world’s hottest bond trade. This comes in the wake of a slew of property-support measures since November 2022. In addition, the stringent “three red lines” policy that fuelled the sector’s liquidity crunch could be relaxed. The rapid dismantling of pandemic restrictions has also boosted sentiment, with economic growth forecasts increasing.

Zeng said that investors have been waiting for data on sectors including retail, industrials and property sales. With growth seen in leisure activities during last week’s Chinese New Year holiday, she noted that junk notes should have room for additional upside.

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“That said, China high-yield dollar bonds will remain volatile,” Zeng cautioned. “So it’s not a trade for everyone.” BLOOMBERG