Increasing credit stress in China stemming from a government crackdown on a range of industries could spread to U.S. investors’ credit portfolios.
Global high-yield fund managers suffering losses in their Asia credit portfolios could look to lower risk across their holdings, or to sell more liquid, high-performing bonds such as U.S. speculative-grade notes to meet redemptions, according to UBS Group AG head of credit strategy Matthew Mish. That selling pressure could weigh on valuations for the securities that are at record highs.
“Managers may choose to reduce risk preemptively or if there’s less liquidity in Asia credit,” Mish said in a phone interview Tuesday. “They may also sell in part because regional valuation differences are extreme.”
Credit distress in China is the most significant risk to global credit markets now, according to Bank of America Corp. That’s because China is the second-largest U.S. dollar corporate bond market in the world with $425 billion in bonds outstanding and the second-largest domicile of dollar high-yield debt at $103 billion, strategists Oleg Melentyev and Eric Yu wrote in a note earlier this month.
