News
Bond funds brace for volatility
Bonds Investors turn defensive amid fears of EM outflowsBY FRANCES YOONGlobal investors are positioning
for an end to the bull run
in credit markets as the US
Federal Reserve prepares for
another interest rate increase
as early as December.
Some of the world’s biggest
fixed-income managers,
including Pimco, Invesco and
Aviva Investors, are buying
options or reducing risk to safe-
proof their credit portfolios
against a faster-than-expected
rise in US interest rates.
The moves highlight growing
concerns over the risk of a
sudden outflow from credit
markets – and especially
emerging markets – should US
yields rise substantially.
“History suggests an inverse
correlation between rates and
credit spreads. A gradual sell-
off in rates usually leads to
tightening in spreads. However,
if the rates sell-off is quick and
violent, almost every asset
class might struggle and so will
credit,” said Harsh Agarwal,
head of Asia credit research at
Deutsche Bank.Even though markets have
started to price in more Fed
rate hikes in the past few
weeks, Fed funds futures for
December 2018 still imply a
policy rate about 50bp below
the Fed’s own predictions,according to a Morgan Stanley
report.
“I think the market is wholly
unprepared for a higher rate
cycle,” said Gareth Isaac, EMEA
chief investment officer at
Invesco Fixed Income. “Fedfund futures are still below
2% in 2019, so little has been
priced in, in terms of rates
hikes in the US.
“The real risk is beyond 2018,
maybe in 2019, when central
banks keep rates low for tooBMW’s Dim Sum 06 IEX IPO marred by snafu 07 UOB’s first dollar AT1 08
Zhongsheng sells short-dated CB
Structured Equity 360-day structure comes to equity-linked market as NDRC curbs stay in placeBY FIONA LAUHong Kong-listed car dealership
ZHONGSHENG GROUP HOLDINGS has
raised HK$2.35bn (US$301m)
from a convertible bond with an
unusually short tenor, mirroring
a structure gaining popularity
among Chinese bond issuers
facing regulatory restrictions on
overseas financing.
Sole bookrunner JP Morgan
last Wednesday launched a CB
of HK$1.75bn for Zhongsheng,
with an upsize option of
HK$600m. Unlike the five-yearput-three structure on a typical
Asian CB, the Zhongsheng issue
has a tenor of 360 days and no
investor put.
It is the first public CB with
a tenor under one year in Asia.
The structure is new in the
CB market, but is becoming
increasingly popular among
issuers in the offshore bond
market.
Chinese companies are
required to register overseas
borrowings with the National
Development and Reform
Commission, which has beenslowing the pace of approvals
in recent months, especially for
real-estate companies and local
government financing vehicles.
Bonds with maturities under
one year do not need to be
registered with the NDRC.
The trend started in May
when several property
developers sold bonds with
tenors just below 365 days.
Recently, some state-owned
companies have also issued
such instruments.
However, a person
familiar with the situationsaid the Zhongsheng deal
was structured to meet the
issuer’s needs and not to avoid
restrictions.OPPORTUNISTIC TRADE
“It’s an opportunistic trade
after a strong share price
run-up and the company is
happy to get some money at
good terms,” said the person.
“It’s about thinking out of the
box. The deal complies with
the regulations and is not
challenging the authorities.”
Although Zhongsheng shares
fell 1.9% to HK$17.30 a day after
the CB sale, they were still up
150% so far this year.
Equity-linked bankers away
from the deal, however, said