Global credit markets benefited from a generally less volatile treasury market with benchmark 10Y UST range-bound between 1.20-1.40% in the third quarter. That further uplifted the performance of the long-duration investment-grade bonds. A number of the long-dated dollar bonds, such as the 30Y investment-grade corporate debts, saw some 3-5 points upsurge from July to mid-September.

That said, Q3 turned out to be the most challenging quarter for credit investors in 2021, especially in the Asian space. The general sanguinity in the global markets was contrasted with a volatile Asian market as the China Huarong AMC saga continued to unravel in the first half of Q3. Huarong, China’s biggest state-owned asset manager, had roiled markets since it delayed its earnings reporting in March. Following the tumultuous few months, it finally secured a rescue package in August from a few of the nation’s biggest financial firms after revealing a record loss of 102.9 billion yuan for FY2020.

As the shockwave from China Huarong began to subside, China Evergrande, the second-largest property developer in China, dropped another bombshell to the Asian dollar bond market with its bonds falling sharply in mid-August. The saga started in July when a Chinese court ordered the freeze on a 132 million yuan bank deposit of Evergrande at the request of China Guangfa Bank. Evergrande claimed that the loan was not due until March 2022 and it planned to take legal action. This was followed by a few banks in Hong Kong declining to extend new loans to buyers of two of Evergrande’s uncompleted residential projects. Thereafter, Evergrande scrapped a special dividend proposal, and the international rating agency S&P cut its credit rating by two notches to B- from B+ with a negative outlook. This was followed by Fitch, another international rating agency, which downgraded Evergrande to CCC+ from B. That effectively sealed the fate of the behemoth, causing Evergrande to drag out the coupon payment on its dollar bonds.

Year-to-date, save for US and Euro high yield bonds, the rest of the fixed income sub-asset classes have given back all their gains for the year. US high yield bonds returned +4.7%, Euro high yield +3.6%, Asia high yield corporate bonds -11.8%, EM corporate bonds -0.3%, US investment-grade bonds -1.1%, Euro investment-grade bonds -0.3%, Asia investment-grade bonds +0.1%, EM USD sovereign debt -2.1%, US government bonds -2.7% and Euro government bonds -2.7%. A lot to show for a year of hard work!

Importantly, as we write, the markets are currently focused on rising costs and the inflationary trajectory as the world continues to grapple with pandemic-related supply-side constraints and disruptions. The latest issue being energy prices. After years of governments’ cajoling and promotion of green and sustainable energy, neglect and low prices have led to inadequate investments in hydrocarbon energy that the world still depends on, resulting in this present crisis which we are seeing today across Brazil, China, Europe, and the USA. As the weather gets colder into the winter months, prices of these commodities are expected to rise in tandem with the increased demand. Meanwhile, the benchmark 10Y UST has already started to break out from its range towards the final week of September, and fast inching upwards and beyond the previous high of 1.60%!

We will continue to exercise prudence in our security selection, pick up oversold quality credits along the way, and taking short-duration bets for the rest of 2021. We remain confident that for those balanced and well-managed economies, corporate and financial businesses with healthy balance sheets and sound financial management will generate stable income for credit investors. We also believe capital markets are supported by ample liquidity which continues to lend support to the performance of corporate credits.
To this end, we encourage everyone to cautiously embrace the reopening of the world, celebrate discreetly, and get used to working and living with Covid, stay safe & healthy!

30 Sep 2021