By Umesh Desai
Fri Jul 27, 2012 7:47am EDT
HONG KONG, July 27 (IFR) - Credit investors are beginning to see a buying opportunity in the offshore renminbi market, where bond yields have more to do with expectations for the currency than company fundamentals.
Since March, the foreign exchange market has been pricing in a depreciation of the renminbi against the US dollar over the next 12 months. As a result, Dim Sum bonds have to offer investors an attractive pick-up over the same credit in other markets to compensate for the expectations of currency weakness.
For instance, Caterpillar Financial Services dollar bonds due 2014 yield 0.55%, while its offshore renminbi bonds of the same tenor offer 3.1%. Similarly, Ford Motor's 2015 Dim Sum bonds yield 4.57%, compared with its 2015 dollar bonds at 2.4%.
"Most investors are still focused on the currency story and that is pushing up yields," said Penny Chen, fund manager with Manulife Asset Management. "If you don't look at the currency, just the credit, the bond prices are attractive. The policy banks are most attractive - these banks have higher ratings and give you a 100bp pick up over CTB (China Treasury Bonds)."
The Dim Sum market remains limited by small issue sizes and fragmented investor holdings, and the majority of bonds come without credit ratings. But yields have reached a point where some fund managers are looking at this market anew.
Yields on the benchmark Bank of China Dim Sum index have stayed above 5% since March, near the highest levels since the asset class was created. China Development Bank's offshore renminbi bonds maturing in 2014 yield 3.1% compared to the benchmark two-year onshore government bond yield of 2.25%.
"You can get higher yields on the same or similar issuer for the same maturity in the Dim Sum market compared with bonds in some other currencies - that's what is making it attractive for investors with a natural bias to renminbi," said Bryan Collins, fund manager with Fidelity.
Should currency be a concern, investors can hedge their renminbi exposure and still pocket a respectable profit.
"As a stark example, in the Hong Kong dollar market, a 2015 Hong Kong government bond will give you an annualised return of less than 0.20% versus 2.5% yields on Chinese government bonds in the Dim Sum market," Collins said. "You can even hedge out the currency exposure, if that's what you want, and still get a better return."
Some investors see Dim Sum as a good defensive bet.
"It may not outperform the rest of EM in a bull market but on the way down it will do better than the rest," said Kevin Daly, portfolio manager with Aberdeen Asset. "In terms of relative value it will not perform as well as FX in Mexico or Brazil, but relative to rest of Asia FX it is a low-risk trade."
Supply concerns easing
The volume of new issues has been a big concern for Dim Sum investors, with supply another factor driving up yields. However, the recent spurt of profit warnings from China's corporate high-yield issuers means that fewer deals are likely to come to market.
In addition, the closing gap between onshore (CNY) and offshore (CNH) yields has dampened the appeal of offshore funding for Chinese issuers.
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"CNH yields should be lower than onshore because people are willing to pay up for access to CNY exposure," said a Hong Kong-based trader. "But right now that difference is converging. Last year it was 200bp-300bp, but now that has dropped to 10bp-20bp."
Volumes have reflected that trend.
According to Thomson Reuters data, issuance in the second quarter fell to Rmb34.7bn from Rmb44.2bn. In July, the slowdown has been even more pronounced with a month-to-date tally of Rmb6.5bn - less than half the monthly average in the year to date.
"Yields have risen in the past year and issuers are not interested in paying up, so many issuers in the pipeline are waiting for a better timing. At the same time, investors have become quality conscious, wanting higher-rated issues," said Bess Lu, DCM origination banker with SinoPac Securities.
"Renminbi loans are also active. Bank liquidity has come back, so many companies are looking at yuan loans first."
Still, even if supply pressures ease and yields stabilise, there are other technical matters that need addressing.
"The bid offer spreads in the CNH market are still wider than their dollar bond counterparts, so trading is difficult," said Manulife's Chen.
Size is a big consideration for institutional fund managers.
"The overall size of the market is more suited for retail investors than institutional investors. We are interested in the sovereign and quasi sovereign type names only, and we wouldn't touch the corporate names for our portfolios," said Aberdeen's Daly.
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