Hong Kong property issuers scrambled to issue perpetual bonds in 2020, capturing the window of falling interest rates to secure long-term funding. Perpetual bonds have been attractive vehicles for issuers to shore up liquidity and preserve cash for the next investment cycle amid the turbulence caused by COVID-19. For investors, perpetual bonds can be an efficient channel to extract a credit premium in the Hong Kong property space, offering decent yield pick-up over senior bonds. Whether this extra risk is sufficiently compensated for by the yield premium is usually subject to debate and is often complicated by long-term interest rate volatility. From a trading perspective, we analyse the technical aspects of perpetual bonds and how efficient they are in extracting value from the sector against the current interest rate backdrop. We complement this with a sector health check post COVID-19 as issuers were hit in varying degrees, depending on their relative exposure to different sub-sectors, including  development property and investment property.

With regards to Credit Strategy, we believe investors should be positioned for the resumption of a spread-compression trading environment in both the high-grade and high-yield sectors going into 2021. With the regional macro operating environment set to improve, we move our mainland China allocation to slight overweight from neutral. We also tilt increasingly towards the high-yield corporate sector and stay with the Chinese property issuers.

Given the risk-off tone, flight-to-quality became more apparent over the past few weeks, in both the investment-grade space and also among high-yield credits, as we discuss in Credit Review. Markit iBoxx ADBI managed to tighten 12bp to 208bp in October, while the average spread of Markit iBoxx AHBI-Corp widened 13bp to 858bp during the same period. However, UST yields were up 3-21bp across the curve, led by 10-30yr yields. Therefore, Asia’s USD bonds’ total returns1 were pushed lower despite tighter spreads. ADBI lost 0.12% in monthly total return, while AHBI-Corp, which is less sensitive to US Treasury movements due to its shorter duration, recorded a positive monthly total return of 0.19% in October. In the primary market, heavy issuance also weighed on secondary trading liquidity, which was relatively light to begin with. USD38bn worth of new bonds were priced in October, which  brought January to October issuance to USD299bn.