Asian Stock Markets
Asian companies are turning to the dollar bond market like never
before, selling record amounts of securities that leveraged investors
desperate for yield are scooping up. But there’s a flip side to all that
growth: it’s getting easier for funds to sell them short.
With unprecedented numbers of first-time borrowers and concerns about the financial transparency of some issuers, the market is increasingly vulnerable to higher volatility. Traders are already reeling from high-profile meltdowns this year after prices collapsed on bonds from Noble Group Ltd. and Reliance Communications Ltd.
One key reason it’s becoming easier to short Asian dollar bonds is that funds are buying more of the securities on borrowed money. The banks that extend that credit hold some of the bonds as security, giving them a greater supply of the notes to lend out to short sellers.
On top of that, Chinese and other financial institutions are buying more of the securities themselves in their hunt for yield, driving sales in the region excluding Japan to a record $310 billion this year.
The two trends have left banks and brokerages with more notes to lend out, which is deepening the repo, or repurchase, market. Those agreements to lend out the securities, retaking possession after a set time, mean that funds on the other side of the trade can sell the borrowed bonds in hope of profiting from price drops.
Because the deals occur off organized exchanges, volume numbers are hard to estimate. But figures on buying by financial institutions underscore the shift. Banks took 30 percent of new note sales this year, up from 17 percent in 2014, JPMorgan Chase & Co. estimated in a note this month.
That all threatens to shake up what’s been a notably stable market, aside from some company meltdowns like Noble. In some cases Asian dollar bonds have shown less volatility than U.S. counterparts during times of stress.
Investors in Asia have up to now also had less opportunity to bet against dollar bonds in the region due to a relative lack of credit-default swaps, which have been slow to catch on compared with developed markets.
With unprecedented numbers of first-time borrowers and concerns about the financial transparency of some issuers, the market is increasingly vulnerable to higher volatility. Traders are already reeling from high-profile meltdowns this year after prices collapsed on bonds from Noble Group Ltd. and Reliance Communications Ltd.
One key reason it’s becoming easier to short Asian dollar bonds is that funds are buying more of the securities on borrowed money. The banks that extend that credit hold some of the bonds as security, giving them a greater supply of the notes to lend out to short sellers.
On top of that, Chinese and other financial institutions are buying more of the securities themselves in their hunt for yield, driving sales in the region excluding Japan to a record $310 billion this year.
The two trends have left banks and brokerages with more notes to lend out, which is deepening the repo, or repurchase, market. Those agreements to lend out the securities, retaking possession after a set time, mean that funds on the other side of the trade can sell the borrowed bonds in hope of profiting from price drops.
Because the deals occur off organized exchanges, volume numbers are hard to estimate. But figures on buying by financial institutions underscore the shift. Banks took 30 percent of new note sales this year, up from 17 percent in 2014, JPMorgan Chase & Co. estimated in a note this month.
That all threatens to shake up what’s been a notably stable market, aside from some company meltdowns like Noble. In some cases Asian dollar bonds have shown less volatility than U.S. counterparts during times of stress.
Investors in Asia have up to now also had less opportunity to bet against dollar bonds in the region due to a relative lack of credit-default swaps, which have been slow to catch on compared with developed markets.
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