Asian Junk Bonds to Beat High-Grade as U.S. Recovers, UBS Says

Jan. 29 (Bloomberg) -- Investors should buy Asian junk bonds as Treasury yields pushed higher by signs the U.S. economy is recovering erode the relative return from investment-grade debt, according to UBS AG.

“I’d pick high-yield over high-grade,” Edwin Chan, UBS’s head of Asian credit research, said in a phone interview from Hong Kong. Junk bonds pay a much bigger margin, so will continue to provide stronger returns regardless of fluctuations in debt sold by the world’s biggest economy, he said.

Two-year Treasury yields rose to their highest in two weeks yesterday and 10-year yields their highest in a week. President Barack Obama, delivering his first State of the Union address, called on Congress to pass tax cuts and spending that would further stimulate the economy and add jobs. Ten-year note yields, currently about 3.67 percent, may rise to 3.9 percent by the end of June, according to Mitsubishi UFJ Asset Management Co.

Signs the global economy is recovering after the worst recession since World War II is spurring demand for riskier assets. The extra return investors demand to own high-yield dollar debt in Asia has dropped 15.04 percentage points to 8.05 percentage points since Jan. 1 last year, according to JPMorgan Chase & Co. data. For Asian high-grade dollar debt it has decreased 4.51 percentage points to 2.5 percentage points.

Credit spreads will tighten further in 2010, especially for high-yield debt, as the economic outlook improves, Chan said. High-yield, or junk, bonds are rated less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.

Junk Sales

Corporate high-yield bond sales in either dollars, euros or yen in Asia outside of Japan total $1.1 billion this month, compared with $6.2 billion for all 2009, Bloomberg data show.

Evergrande Real Estate Group Ltd. sold $750 million of 13 percent notes on Jan. 22, the biggest Chinese real estate high- yield offering ever, according to Bank of America Merrill Lynch, which helped manage the sale. Evergrande’s bonds were yielding 12.8875 percent yesterday, prices from Calyon show.

It’s been the busiest start to a year in the U.S. in dollar terms for junk bonds in a decade, according to data compiled by Bloomberg. Virgin Media Inc., the U.K.’s second-largest pay- television company, this month helped push offerings of high- yield debt in Europe to a record.

“More supply of high-yield and high-grade bonds is not necessarily a bad thing for credit spreads,” Chan said. “The demand for bonds is still high.”