Asian Corporate Bond Spreads May Not Reflect Underlying Risks

Abstract

Corporate debt levels in emerging Asia have been growing rapidly. Yet despite the accumulation of debt, average yields on Asian corporate bonds generally fell after the financial crisis of 2008, and before the COVID-19 pandemic there was little differentiation between credit risk spreads on U.S. dollar bonds by high-yield and investment grade issuers. At the onset of the pandemic, however, bond spreads rose sharply, especially on high-yield debt. And although spreads have since retreated, spreads on U.S. dollar bonds issued by BB-rated Asian corporations remain well above spreads on those issued by their investment grade BBB-rated peers. This suggests that risks associated with high-yield bonds were higher than implied by pre-pandemic spreads that tightened in an environment of accommodative global monetary policy.

Authors:

Adrienne Taylor