Asia's junk bond rally near exhaustion

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SummaryThe MSCI index of Asia ex-Japan stocks has climbed 6 percent since the end of November.

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 points, that would wipe out gains from a carry perspective in Asian yields," said Kaushik Rudra, credit analyst at Standard Chartered Bank.

TREASURIES THREAT

It's a threat that has been steadily amplified by signs of improving economic growth in the United States and China, by the Federal Reserve's allusions to a quicker end to its aggressively easy monetary policy and, mainly, the avoidance at the start of the year of a massive automatic tightening in U.S. fiscal policy. Ten-year Treasury yields have risen 30 basis points in the past six weeks.

"Everyone is cautious on rates. The less rate-sensitive the credit, the better it is for investors," said Rajeev De Mello, a fund manager with Schroders.

"That may explain why high yield has got ahead of others. Plus it is also the yield environment where people are looking for higher yielding assets," he said.

Junk bonds, by virtue of their high yields, should offer a better spread cushion against that risk of a selloff in Treasuries, but the year-long rally had eroded the buffer.

Standard Chartered's Rudra doesn't have a big selloff in junk bonds as his base case, but warns that it wouldn't be an unrealistic scenario.

"Once you start seeing a shift, you could have momentum build up. A lot of people could start selling fixed income products in anticipation of bigger moves on the Treasury side and it becomes self -fulfilling," he said.

The interest in new issues could also be waning.

In the first week of the year, International Container Terminal Services received orders of $5.5 billion for a $300 million issue, Hopson received $6 billion of bids for a $300 million issue and Indonesian developer Lippo Karawaci's issue was subscribed more than six times.

But just a week later, KWG Property pulled a perpetual bond issue after attempts to woo wealthy retail investors with a

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