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Corp bonds in China seen lukewarm in early August, UFV bonds eyed

2014-08-21 GMT+8:00

BEIJING, Aug. 20 (Xinhua) – China's corporate bond market lacked excitement in the first half of August while bonds offered by urban financing vehicles (UFV), the financing platforms of local governments were still favored by investors.

Data from, an interbank bond settlement backstage, showed that interbank corporate bond yields mostly dipped 2-3 basis points (bp) on Tuesday.

Apparently, corporate bonds can bring better returns than interest rate-linked products, referring to T-bonds and policy-bank bonds which enjoy zero risk weighting, at present.

"In our opinion, the time for risk-assets' appreciation has not left now," said Xu Hanfei, a bond analyst of Guotai Junan Securities thus alongside the country's economic recovery, corporate bonds were no longer better than equity assets in terms of rate of returns.

Usually, corporate bonds, in particular high-yield bond or junk bond, perform better than interest rate-linked bonds and equity assets at the end of an economic recession cycle and the early stage of an economic expansion when corporate credit conditions are the worst.

After that when an economy enters the middle and late period of an expansion cycle, corporate bonds including junk bonds can still earn positive returns but they can not outrun equities.

"Undoubtedly,China's corporate bond market resembles the above-mentioned first phase but its recent performance is like the second phase," argued Xu, adding that "currently, corporate bonds' risk-benefit ratio stays between those of interest rate-linked bonds and equity assets. IfChina's economic fundamental continues to warm, investors' risk appetite will increase but earning coupon from corporate bond is still a choice as no basis for the country to largely hike up benchmark interest rate is in sight."

"From the technical angle, low-rating corporate bonds are still worth of betting on given investors' still ok risk appetite at present as long as no wide-scale credit risks occur for their credit spread is one fourth lower than the historical highs," reckoned a bank trader.

"Of course, we also suggest bond buyers to pay attention to listed firms' financial results in the third quarter, some corporate bonds' trading suspension for risk control," remained the trader.

As for concrete product picking, many securities brokers including Guotai Junan Securities, Haitong Securities and China Securities generally believe that UFV bonds are still a good investment choice.

According to them, other corporate bonds such as high-rating ones have limited upward room while high-yield bonds sold by private firms are not suitable for all kinds of investors due to the restraints from their weak credit conditions and frequent occurrence of credit risks in spite that their credit spread is relatively high.

Under such a condition, UFV bonds stand out among all corporate bonds given their low valuation risk in short term and relatively balanced supply and demands.

"This year, bonds sold by state-owned or related issuers and private issuers diverged and on basis of the fluid liquidity and ongoing risk-aversion atmosphere, demands for UFV bonds remain robust but their supply is likely to fall short of demands after booming in the first half year therefore we still recommend UFV bonds for investors," said Jiang Chao, chief bond researcher of Haitong Securities. (Edited by Duan Jing,