Dim sum bond fund managers, armed with US$2.6 billion and little to spend it on are struggling with a market creaking under the challenges of record maturities and slumping sales.
Ben Hsueh (薛博升), who oversees an offshore yuan fund at Fubon Asset Management (富邦投信) in Taipei, said he currently has few investment choices.
His high-yield bond fund has reduced holdings of dim sum notes from 50 percent in 2013 to less than 10 percent, with the remainder made up of a small portion of onshore debt and 90 percent of US dollar credit that it hedges back into the yuan.
Three years of yuan depreciation have weakened demand for assets denominated in the currency. Foreign investors are also looking onshore to sell debt as China expands access and encourages the expansion of its so-called panda bond market for overseas issuers.
“The dim sum market is a transitional one, because foreign issuers can sell panda bonds in China and the onshore costs are lower,” Hsueh said. “You don’t have many choices in the offshore yuan market now.”
More than 180 billion yuan (US$26.1 billion) of dim sum notes are to become due this year, while net issuance is forecast to slump further after slipping into the negative for the first time last year.
The size of offshore yuan bond funds has shrunk to one-third of 2014’s US$9.5 billion, data from research firm Morningstar Inc showed, while the currency has weakened 1.2 percent in the past month in Hong Kong to a two-month low of 6.92 per US dollar yesterday.
Buying more US dollar credit is one solution. Stratton Street Capital LLP’s Renminbi Bond Fund, the first offshore yuan fund worldwide, has never bought a dim sum bond and relies only on US dollar notes.
“We have a very large, liquid pool of dollar bonds that we can choose from and we’ve got almost unlimited choice, and we are hedging into renminbi,” said Andy Seaman, London-based manager of the Stratton Street fund, which beat 96 percent of its peers focused on Asia fixed income in the past five years.
“The problem that international investors have is that most dim sum issues are too small,” he said.
This year’s issuance of dim sum corporate notes reached US$745 million, dwarfed by US$570 billion of US dollar corporate bond sales worldwide and US$124 billion of onshore Chinese debt denominated in the yuan.
Tighter offshore yuan liquidity also means implied forward yields are higher, which helps boost returns when US dollar positions are hedged back into the yuan.
All 18 dim sum bond issuers this year have been financial firms. In 2014, sellers ranged from Chinese developers to Renault SA and Fonterra Cooperative Group Ltd.
Adding to the challenge in Hong Kong are volatile yuan borrowing costs, with rates often moving more than 1 percentage point per day amid suspected Chinese central bank intervention to make it costlier to short the yuan.
Offshore yuan bond funds have returned an average 2.7 percent over the past year, compared with 5 percent for Asia fixed income funds, data compiled by Bloomberg showed.
Issuance is likely to revive, because there is still reinvestment demand, Income Partners Asset Management (HK) Ltd’s (豐收投資) Raymond Gui (桂林) said.
His dim sum bond fund — launched in 2010 when access to onshore markets was far more limited — does not buy onshore securities because of its mandate. The firm has another fund investing in domestic notes.
The offshore yuan market will exist as long as China does not entirely open up the onshore market, and yuan internationalization has only paused after rapid progress earlier, said Haitong Asset Management (HK) Ltd (海通國際證券) managing director James Su (蘇耿賢), who oversees the territory’s first dim sum bond fund.
This is not a bad time to buy dim sum bonds. The average yield has fallen to 4.71 percent, but remains above the historical average, Deutsche Bank AG index showed.
The yield on offshore government bonds still trumps the onshore level, and the drop in new supply should support a rise in prices.
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