For the first time in more than a year companies in Asia are seen as more creditworthy than their global peers, a sign of confidence that economic growth in China will bolster the region as the rest of the world falters.
The Markit iTraxx Asia index of credit-default swaps fell below the average of four corporate bond risk gauges from around the world this week, according to data provider CMA. The Asian benchmark of contracts on 40 borrowers outside Japan tumbled 58 basis points this year to 149 basis points, the biggest decline among Markit Group Ltd. indexes for the U.S., Europe, Australia and Japan.
China, the world’s biggest economy after the U.S., is stepping up efforts to support growth as Europe’s debt crisis dents demand for exports. While the median estimate of economists surveyed by Bloomberg is for China’s gross domestic product to expand 8.2 percent in 2012, that would still outstrip the 2.2 percent worldwide. Asia’s growth is forecast at 6.82 percent.
“China’s GDP growth is still the envy of most other countries and is more than sufficient to underwrite regional fundamentals,” said Mark Reade, an analyst at Credit Agricole SA in Hong Kong. “Many Asian corporates offer superior credit quality compared with companies in other parts of the world that have narrower CDS levels.”
The Markit iTraxx Asia index was as much as 74 basis points higher than the average of the other four indexes in October, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The measure for Asia is comprised of swaps on 36 banks and non-financial companies ranging from Cnooc Ltd. (883), China’s largest offshore energy explorer, to South Korea’s Hyundai Motor Co. (005380), as well as those on sovereign debt of China, Malaysia, Korea and Thailand.
Elsewhere in credit markets, bonds of Boston-based Iron Mountain Inc. are the most actively traded dollar-denominated corporate securities by dealers today, with 114 trades of $1 million or more as of 12:01 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The $1 billion of 5.75 percent bonds due August 2024 sold at par yesterday by the world’s largest document storage company fell to 99.875 cents on the dollar as of 11:52 a.m. in New York, Trace data show.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, increased 0.17 basis point to 19.65 basis points as of 12:02 p.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 0.24 basis point to a mid-price of 103 basis points as of 12:02 p.m. in New York, according to Markit Group Ltd.
The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The last time the Markit iTraxx Asia index traded below the average of four global corporate bond risk gauges was June 2011. The other bond risk benchmarks are the Markit iTraxx Australia index, Markit iTraxx Japan index, Markit iTraxx Europe gauge and Markit CDX North America Investment Grade index.
“In spite of the recent worsening of the European crisis, Asia credit has remained very resilient in the past month,” Morgan Stanley analysts Viktor Hjort, Kelvin Pang and Nishant Sood wrote in an Aug. 3 report.
China has been the engine of growth in Asia, with the central bank showing its willingness to ease monetary policy to keep the economy expanding. The People’s Bank of China said this month that it will keep pursuing a “prudent” monetary policy and the nation’s economy will maintain stable growth even amid the risk the global recovery will falter.
“At present, the primary risk for the global economy is still the European debt crisis,” the central bank said in an Aug. 2 statement. The possibility of Europe “triggering a double dip in the global economy can’t be ruled out,” it said.
Spreads on high-grade Asian debt dropped to 223 basis points on Aug. 6, from 280 basis points on June 1, according to the Bank of America Merrill Lynch High Grade Asia Emerging Markets Corporate Plus Index. That’s still higher than the 190- point spread on U.S. investment-grade debt and 196 points on the Global Broad Market Corporate Index, the data show.
Dollar-denominated debt offerings in the Asia-Pacific region were $10.1 billion in July, according to data compiled by Bloomberg. That’s up from $5.96 billion in June and marks the biggest month since $12.5 billion was sold in May, the data show. Sales this year of $81 billion compare with $54.6 billion in the same period of 2011.
“People need these names for diversification, they need these names for yield, these issuers are meeting with a warmer reception than ever before,” Ed Marrinan, co-head of market strategy for the Americas at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview. “Investors are anxious to get yield and they’re scouring the global financial markets to achieve that objective.”
When Shui On Land Ltd. sold $400 million of 9.75 percent bonds due in February 2015 on July 30, the Chinese property developer’s offering received about $2.5 billion of bids from more than 150 investors, according to a person familiar with the deal. China Petrochemical Corp., known as Sinopec Group, was able to pay a spread of 145 basis points over U.S. Treasuries when it issued $500 million of 10-year securities on Aug. 6, Bloomberg data show. That’s down from a 210-point premium on an offering of similar notes in May.
Pacific Investment Management Co., or Pimco, recommends the bonds of gambling companies with exposure to Macau, such as Las Vegas Sands Corp. and Wynn Resorts Ltd., Mark Kiesel, global head of corporate bond portfolios at the manager of the world’s biggest bond fund, wrote Aug. 6 in a report.
“Macau may benefit secularly from a rising middle class and growing mass market of gamblers,” he wrote.