Bond Market Insights - Week Ending June 18th 2022
On Friday China had a weak day. China IG was as much as 7bps wider as US Treasuries gyrated. The short end saw two-way flows with real money lightening up and Chinese banks keen to pick up paper. AT1’s were generally well supported, ending unchanged on the day. LGFV remain soft.
Country Garden and CIFI slipped 2pts where selling interest dried up, but the main casualty was in the non-property sector where the FOSUNI curve continued to be punished following Moody’s putting the credit on review for downgrade. It fell 8-10pt before some short covering pulled it back. FOSUNI 5.05 01/27/27 (BB) tested $60 at one point, a yield of 18.25%.
Goldman speculates that defaults and bond maturity extensions in China Property will continue to dominate over the next quarter as more redemptions come due. The Ice-BAML China Property HY index is showing a 47% decline so far this year, and around 60% of all China Property HY bonds are priced below 35.00. Prices will continue to be under pressure until physical property rebounds and there is more clarity over which developers are likely to survive this maelstrom and which will default.
State-owned enterprises are dominating the property sector thanks to better access to funding from government-controlled banks and other official support. They can afford to buy new land, as the rest of the sector struggles to meet obligations.
In May, five of the top six developers which released monthly sales figures were state-owned. Poly Real Estate (Baa3/BBB-) showed a smaller decline in sales than bigger rivals. Its year-on-year drop was 36%, compared with 47% for Vanke (Baa2/BBB) and 50% for Country Garden (BBB- Fitch), which was the top seller in January and February.
To compare bond yields POLYRE 4 ¾ 09/17/23 is currently offered around 4.43%, VNKRLE 4.2 06/07/24 at 4.75 and COGARD 8 01/27/24 at around 37%.
China Evergrande was ranked 2nd a year ago but has stopped disclosing sales figures, while the recently defaulting Sunac slipped from #1 to 8th.