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Asian Blue-Chip Bonds Hit Decade High Prices Amid US Gap

Asian investment-grade dollar bonds hit historic price highs amid low risk premiums, contrasting sharply with US counterparts.

By Athena Xu

5/16, 20:34 EDT

Key Takeaway

  • Asian investment-grade dollar bonds are trading at historically low spreads, indicating a reduced risk premium and making them the most expensive in years.
  • The disparity between Asian and US bond valuations has widened, with US bonds offering higher risk premiums compared to their Asian counterparts.
  • Market dynamics are influenced by global economic indicators, including US inflation data and China's market activities, affecting bond valuations.

Asian Bond Market Dynamics

Investors navigating the Asian investment-grade dollar bond market are currently facing a unique set of circumstances. The spreads on these bonds are nearing historically low levels, indicating that the premium paid for risk is at its lowest point in years. This development comes at a time when the median net leverage of Asian borrowers has escalated to its highest level since 2021 during the first quarter of the year. Consequently, bondholders are receiving a significantly reduced risk premium, the lowest since at least 2014, making these bonds appear expensive not only historically but also in comparison to their counterparts in the United States.

The disparity in value is further highlighted when comparing the spread per turn of leverage between Asian and US bonds. Specifically, only 16% of the Asian high-grade index carries a rating higher than A, with 67% rated A or below. This contrasts with an index of A-rated bonds in the US, where the spread per turn of leverage for Asian bonds is notably low. The basis-points-per-turn of leverage for the Asian index has a lower z-score than any of the US debt indexes for bonds rated between A to B. This implies that Asian investment-grade bonds are trading at a premium relative to their historical performance.

Comparative Analysis with US Bonds

The analysis of the bond market reveals a significant divergence in the valuation of Asian investment-grade bonds compared to their US counterparts. The ratio of spread per turn of leverage between US bonds rated A and Asian IG bonds is at its highest since March 2020. This indicates that investors in US bonds are receiving a higher risk premium relative to the risk undertaken with Asian debt than in recent years. The methodology behind this analysis involved identifying the equity tickers for all borrowers within the Asia investment-grade index and calculating the net debt/Ebitda figure for all non-financial entities that provide data. A comparison of the median net leverage of borrowers within the index today against the spread on the index at quarter-end offers a clear picture of the current market dynamics.

Market Response to Global Economic Indicators

The Asian bond market's current state is also influenced by broader economic factors, including reactions to US inflation data and China's market activities. On May 16, 2024, Asian markets rallied in response to US inflation data and purchasing actions by China, underscoring the interconnectedness of global financial markets and the sensitivity of bond valuations to macroeconomic indicators. These developments reflect the complex interplay between regional economic policies, global market trends, and investor sentiment, all of which contribute to the current valuation of Asian investment-grade dollar bonds.