Junk debt from some of Asia’s biggest companies gained after the Japanese central bank shifted the focus of its stimulus and speculation mounted that the global hunt for yield will cushion speculative-grade bonds even if the Federal Reserve were to surprise markets with an interest-rate increase later on Wednesday.
Dollar notes sold by borrowers including China Evergrande Group and Vedanta Resources Plc rose Wednesday. That came after the Bank of Japan said it would move away from a rigid target for expanding the money supply and as traders saw only a 22 percent chance that the Fed would tighten policy at its upcoming meeting. Speculative-grade Asian bonds denominated in the U.S. currency have returned 3.7 percent in the current quarter and are on track for their best year since 2012, Bank of America Merrill Lynch index data showed as of Tuesday.
“Japanese investors have become important buyers of Asian credit again and are keen to put money to work due to the negative rates at home, so any adding to quantitative easing is good for the Asian credit market,” said Owen Gallimore, a corporate credit analyst at Australia & New Zealand Banking Group Ltd. in Singapore. “The Bank of Japan’s actions look relatively dovish; they have recommitted to expanding the monetary base until inflation exceeds the 2 percent level.”
The BOJ said Wednesday it would seek to control bond yields across different maturities and that its target for expanding the monetary base through asset purchases may now fluctuate in the short term to enable the bank to implement that policy.
The average yield to maturity on junk-rated greenback bonds from Asian issuers dropped to 6.45 percent earlier this month, the lowest since the Bank of America index began in 1996.
Appetite from a growing number of wealthy Chinese investors is also helping buoy the market, even as futures traders price in a greater than 50 percent chance of a Fed rate increase by the end of 2016.
“We saw a significant selloff in Asian bonds when the taper tantrum happened in 2013,” said Lim Swee Ching, portfolio manager at Western Asset Management in Singapore. “But what has changed now is there has been a wall of Chinese money chasing dollar assets since last year and new issuances have been placed more and more with Asia-based investors. This could offset some negative impact from foreign investors pulling money out of the region if the Fed hikes rates.”