While BofA’s base-case calls for “no crisis,” the soaring levels of bond-sale cancellations hitting the non-government credit markets is starting to make Asia strategist David Cui nervous…
Year-to-date, 241 non-government bond issuances had been cancelled or postponed; 120 so far in April alone, vs. 315 in total in 2015 (Chart 1). At this stage, the situation appears manageable – in April month-to-day, issuers successfully sold 709 bonds (worth Rmb1.04tr), so the success rate is still above 85%. That said, if, contrary to our expectation, the bond market indeed corrects sharply, finances of developers, banks, brokers, industrials and utilities may suffer disproportionally, by our assessment, because they are highly geared and they have heavily relied on bonds recently.
Bond default risk is mispriced: A perceived implicit government guarantee on bonds and other moral hazards in the shadow banking sector, including wealth management products, is largely behind the mispricing, in our view. There also appears to be noticeable bond-rating inflation, in our opinion.
This post was published at Zero Hedge on 04/28/2016.