spread

us high yield oas spreads under 4 % (3.83, entered 2017 4.2 and roughly 50% under 5 year average 6%)

chinese high yield the default choice in declining leverage and oncoming maturities

shaken but not stirred

shaken but not stirred

The good times won’t last, say money managers HFT Investment Management Co. and Bosera Asset Management Co., which expect more companies to run into problems meeting debt repayments in the second half as the government continues a deleveraging drive. Investors must also consider the danger of hidden debt guarantees, after the issue flared again last month with two chemical makers in the nation’s east.

“The number of credit events in the second half may exceed that in the first half,” as companies that have taken on more debt buckle under the servicing costs for those obligations, said Lu Congfan, a fixed-income assistant fund manager at HFT Investment Management Co. “If you step on a land mine in your lower-rated bond investment, you will suffer big losses. Such investments aren’t appropriate for many investors.”

China’s junk-rated borrowers also face a looming maturity wall, with a record amount of bonds coming due in the second half. While investor demand remains resilient for now, with spreads narrowing in June even amid the heavy issuance, speculation is mounting that regulators’ patience is limited. The government will continue its crackdown on excessive borrowings, fueling debt repayment pressure for weak companies, said Lillian Li, a senior analyst at Moody’s Investors Service.

So far, holders of Chinese junk bonds have made out well after the recent market rebound. The yield premium on three-year AA- rated corporate securities over AAA notes has dropped 32 basis points since May 31 to 147 basis points, the lowest since 2013.