China Evergrande Fallout Hits Western Bond Funds
Bonds of other property developers dropped sharply.
Bonds of other property developers dropped sharply.
The potential default of real-estate developer China Evergrande Group is taking a toll on funds in Europe and the U.S. that chased high yields in the Chinese corporate bond market.
Concerns that Evergrande might not pay its bonds this month triggered selling of other companies in the country’s property sector, weighing down funds managed by Ashmore Group, BlackRock Inc. and Pacific Investment Management Co., among others.
While Evergrande bonds have been trading around 25 cents on the dollar for much of September, selling spread Monday to other large developers. Yuzhou Properties‘s 8.5% bond due in 2024 dropped about 10% to 75 cents on the dollar, according to Advantage Data Inc.
Fears of spreading fallout hit U.S. stocks and bond yields Monday, driving the yield on the benchmark 10-year Treasury note down to 1.308%, according to Tradeweb, from 1.369% Friday.
Western money managers increasingly purchased Chinese corporate bonds in recent years despite signs of a housing bubble. The buyers were looking for investments that paid more than the anemic yields in their domestic markets and could benefit from China’s high economic growth compared with developed markets. Many also believed that China’s government would bail Evergrande out if it foundered because of its size—the firm owed about $89 billion of debt as of June.
Some of the China bulls, like Ashmore, were emerging-markets specialists, but others were global-bond funds that traffic in developed and developing markets.
One of Ashmore’s larger funds lost about 1% last week and is underperforming comparable funds by 3.62 percentage points this year, according to data from Morningstar. The firm owned by U.K. financier Mark Coombs also performed poorly in 2020 after large bets in Argentina, Ecuador and Lebanon backfired in quick succession. Its stock has dropped about 20% this year, according to data from S&P Capital IQ. A spokesman for Ashmore declined to comment.
A global income fund managed by BlackRock lost about 0.31% last week and is lagging behind competitors by roughly one percentage point in 2021. The Ashmore fund was about 5% invested in Chinese corporates and the BlackRock fund had an approximately 7% exposure.
Worries may be overblown that default by Evergande could trigger a systemic crisis in China, much like Lehman Brothers Holdings Inc. did in the U.S., because other developers are functioning well, said Alan Siow, a portfolio manager at Ninety One.
“We don’t think Lehman is an apt analogy,” said Mr. Siow, who does not own any Evergande debt in his emerging-markets corporate bond fund and is focused on finding “companies that are best positioned to succeed in this environment.”
Distressed-debt hedge funds are also turning their sights on China’s corporate bonds, hoping to buy at bargain prices and to profit by restructuring the debt or by selling out when the broader market rebounds. “We’re doing a lot of heavy-duty work on [China],” said a portfolio manager at a New York-based fund.
A group of Evergrande bondholders formed a committee in recent weeks to create an organized negotiating block in restructuring talks with the company and the Chinese government, a person familiar with the matter said. Investment bank Moelis & Co. and law firm Kirkland & Ellis LLP are advising the group, the person said.
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New research suggests spending 40 percent of household income on loan repayments is the new normal
Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.
Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.
“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.
CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.
Sydney
Sydney’s median house price is $1,414,229 and the median unit price is $839,344.
Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.
Melbourne
Melbourne’s median house price is $935,049 and the median apartment price is $612,906.
Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.
Brisbane
Brisbane’s median house price is $909,988 and the median unit price is $587,793.
Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.
Adelaide
Adelaide’s median house price is $785,971 and the median apartment price is $504,799.
Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.
Perth
Perth’s median house price is $735,276 and the median unit price is $495,360.
Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.
Hobart
Hobart’s median house price is $692,951 and the median apartment price is $522,258.
Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.
Darwin
Darwin’s median house price is $573,498 and the median unit price is $367,716.
Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.
Canberra
Canberra’s median house price is $964,136 and the median apartment price is $585,057.
Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.
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