UBS Remains Defensive On China’s Credit Bonds
Caveat emptor to buyers of China Credit Bonds, says a new report from a big investment bank.
With limited breakeven spreads across all tenors and yield curves staying flat, one UBS analyst remains defensive on China’s credit bonds and prefers the high grades with short durations. Cynthia Cheng said in her January 12 research note entitled “China Credit Strategy” that she believes the concerns about liquidity condition and credit risk will continue to influence yields and spreads.
China Credit Bonds – Major events add to China’s bond market volatility
Highlighting the major action-filled events since the beginning of last month, Cheng points out that the last few weeks witnessed several incidents in the bond market, including repeated credit events, tighter liquidity condition and stricter regulatory rules. She believes these events pushed up market volatility in both the cash bond and bond future markets.
The following table captures the key events in China’s credit market:
Tricadia Capital Worries About “Gargantuan Cedit Machine In China”
China Credit Bonds
The analyst points out that since mid-December, cash bond yields surged quickly with more prudent expectations on liquidity. The yields continued to surge with higher-than-anticipated December PMI during the first week of this year. The UBS analyst notes that from the end of November until the first week of this year, the overall credit yield curve shifted up, with more adjustment for low-grades.
The analyst points out that the industry spread expansion was more significant for higher ratings like AAA, and the AA- industry spreads exhibited divergence among sectors. Cheng notes that in December, the downward trends of the average spreads reversed for a few sectors such as mining, steel and chemical.
China Credit Squeeze: Goldman Is Calm As Fears Of …
China Credit Bonds issuance shrank in December
Cheng points out that the primary market for China’s credit bonds remained weak following net redemptions in the credit space. She notes that the gross issuance of credit bonds dropped 57% month over month to RMB496.6 billion in December. Of note, commercial paper plunged 71% month over month in December.
However, in terms of products, asset-backed securities witnessed relatively large increase in their issuance, while issuance of corporate bonds, enterprise bonds, MTN and PPN dropped by 64%, 65%, 58% and 79%, respectively.
On higher volatility in the secondary market, the UBS analyst points out that the low-grade AA-curve shifted up more than the AAA curve. She notes that the movements of credit yields lagged the rates yields, with credit spreads first narrowing, but then widening during the early weeks of December. However, with the gradual easing of market sentiment, the trend of credit spread expansion witnessed a reversal. The analyst points out that the AA spreads witnessed a larger upward movement at around 45-62bp.
Cheng notes that when the central bank injected liquidity through a medium-lending facility, the market mood witnessed an easing trend after December 16. She points out that the liquidity condition remained loose after the year-end effect. Though liquidity condition might still be under pressure toward the Chinese New Year, she believes the possibility of panic on liquidity shock again has dwindled.
The post UBS Remains Defensive On China’s Credit Bonds appeared first on ValueWalk.
Source: valuewalk
