{"id":62770,"date":"2018-02-08T15:09:11","date_gmt":"2018-02-08T15:09:11","guid":{"rendered":"http:\/\/www.bnreport.com\/asias-rich-must-exit-crowded-trades-cut-leverage\/"},"modified":"2018-02-08T15:09:11","modified_gmt":"2018-02-08T15:09:11","slug":"asias-rich-must-exit-crowded-trades-cut-leverage","status":"publish","type":"post","link":"https:\/\/www.bnreport.com\/en\/asias-rich-must-exit-crowded-trades-cut-leverage\/","title":{"rendered":"Asia’s rich must exit crowded trades, cut leverage"},"content":{"rendered":"

By Andy Mukherjee<\/strong><\/p>\n

While equity markets were braving a cold, bleak Tuesday morning meltdown in Hong Kong, the bond market<\/a> was basking in sunshine \u2014 or at least trying to keep itself warm in the not-so-bright glow of Sunshine 100 China Holdings Ltd.'s $165 million dollar bonds<\/a>. <\/p>\n

Amid the carnage, and with Goldman Sachs<\/a> Group Inc. warning of more pain ahead, the stressed Chinese builder, rated CCC+ by S&P Global Ratings, got away with paying just 8.5 percent, less than the 9.2 percent yield<\/a> on its existing $235 million notes. <\/p>\n

The older securities were issued in September, when Libor<\/a> was at 1.3 percent. Now the benchmark for global borrowing costs is 1.8 percent. Investors' candles are burning at both ends: their funding costs are rising, and simultaneously, their compensation is falling. <\/p>\n

No doubt the Chinese securities firms that scooped up the bond offer will push it toward private-banking clients. Asia's rich are often tempted to use leverage to soup up returns. But can the wealthy really continue to feast on crumbs? <\/p>\n

It would be unwise. "Now's a good time to cut leverage," says Michael Levin, head of asset management for Asia-Pacific at Credit Suisse Group AG. <\/p>\n

Thanks to a deluge of liquidity, credit spreads on high-yield bonds have gotten super-tight. There are safer alternatives, such as senior secured bank loans by identically or similarly rated issuers, which, according to Levin, provide reasonably high yields, and may be a good asset class to weather the current storm in equities. <\/p>\n

That's especially the case if the trigger for this week's equity-market correction is indeed the fear of inflation<\/a> returning (along with higher interest rates). <\/p>\n

In a rising interest rate environment, it makes little sense to magnify the miserly yields of junk bonds using risky leverage. Seeking safety in investment-grade notes may not be such a great idea, either. <\/p>\n

Consider 12-month periods ending in December 1994, December 1999, May 2004 and June 2006. In each case, 10-year U.S. treasury yields jumped by more than 1 percentage point. Investment-grade bonds lost money each time, while senior loans rose. The most that PowerShares Senior Loan Portfolio, an exchange-traded fund, has lost in any year since its inception in March 2011 is 0.73 percent. <\/p>\n

\"2\"<\/figure>\n

Overall, the Credit Suisse Leveraged Loan Index, which goes back to 1992, has only had two down years: A 29 percent drop in 2008 was followed by a 45 percent jump in 2009, while the slide of less than half a percent in 2015 was erased by a 10 percent gain in 2016. The gauge closed 4 percent higher last year. <\/p>\n

About $1.5 trillion in dollar-denominated leveraged loans were issued in 2017, a 50 percent increase as companies rushed to lock in low financing costs. So far this year, issuance is down 67 percent. But because these loans are contracted on floating rates, there's a reasonable amount of juice here for yield-hunting investors. <\/p>\n

The brave among the rich might continue nibbling into red-hot high-yield offerings, hoping they don't get burned. But frankly, the likes of Sunshine are paying too little; so don't rule out a cooling of investor ardor for Chinese developers. <\/p>\n

This week's equities gyrations may or may not last, but they're definitely a wake-up call for those at Asia's junk bond party. Even the wealthy can't afford to hit snooze and make like nothing has changed. <\/p>\n

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners)<\/em><\/p>\n

<\/a><\/strong> <\/a><\/p>\n

Original Article<\/a><\/p>\n

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ET Markets<\/a><\/h5>\n

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By Andy Mukherjee<\/p>\n

While equity markets were braving a cold,..<\/p>\n","protected":false},"author":1,"featured_media":62772,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[202],"tags":[],"class_list":["post-62770","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"yoast_head":"\nAsia's rich must exit crowded trades, cut leverage - Business News Report<\/title>\n<meta name=\"description\" content=\"By Andy Mukherjee While equity markets were braving a cold,..\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.bnreport.com\/en\/asias-rich-must-exit-crowded-trades-cut-leverage\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Asia's rich must exit crowded trades, cut leverage - 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