Yield-chasing investors, whose hunger for income powered a long rally in Asian junk-rated bonds, are finally feeling the first symptoms of indigestion after a year-long binge.
The signs of excesses in the rally that left some junk bond holders with returns of 45 percent in 2012 are several.
In the first week of the new year, investors put in an overwhelming $45 billion of bids for $1.75 billion of bonds offered by three junk-rated property firms from China.
But a more recent bond issue from Guangzhou R&F Properties was subscribed less than three times, while KWG Property withdrew its perpetual bond offering after it was covered just two times.
Alarm bells rang again when Chinese property firm Hopson Development Holdings Ltd., a company that is rated just four notches above default, raised money through 5-year bonds paying less than 10 percent, a rate less than half of what it would have had to pay a year ago.
KWG's cancellation was driven by investors' concerns that the bond issue was as risky as an equity investment, while a bunch of recent issuers have watched their bonds fall sharply in secondary market trading.
Even by themselves, these could be signs of an extremely frothy market taking a breather. But viewed alongside data showing investors globally are putting their faith in economic recovery and therefore shifting their cash back into stocks, they spell trouble for the yield junkies.
"Clearly the market is facing indigestion, especially due to supplies from property companies," said Arthur Lau, head of fixed income, Asia-Pacific at Pinebridge Investments.
The first weeks of 2013 have indeed seen a steady stream of bond issues by sub-investment-grade and investment grade companies hoping to exploit the remnants of last year's desperate hunt for yield, including Hong Kong Broadband, Korea Development Bank, Cheung Kong Holdings and Agile Property Holdings Ltd.
At the same time, investment-grade companies that supplied the bulk of 2012's record $133.8 billion of foreign currency bond issues have retreated somewhat since December.
A big reason for that shift has been the worry that even in a world of zero interest rates, top-rated bonds in Asia no longer adequately compensate investors for the risk of a spurt in U.S. Treasury yields, to which their coupons are benchmarked. "There is not a lot of spread cushion left in our market, so if we do see a reasonably large shift in the U.S. Treasury market of say about 80 basis