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BLOOMBERG‘s Shuli Ren writes:

Amid hopes of a Covid-19 vaccine, reflation trades are in, as investors sink their money into riskier assets. Junk bond yields in the U.S. were pushed to record lows this week. But that enthusiasm hasn’t spilled over to Asia. 

Wall Street’s biggest banks are chiming in. Goldman Sachs Asset Management sees “attractive” returns for Asia’s high-yield dollar bonds, which are dominated by Chinese issuers. JPMorgan Chase & Co concurs. In a recent report, the bank noted that the default rate currently priced in, at roughly 7%, “looks excessive” because the actual figure remains at a well-behaved 2.7% this year.

Are we seeing free money on the table, or do traders know something big banks don’t? 

Sure, the default rate may not have been skyrocketing, despite Covid. That’s largely thanks to a ballooning number of new issues. But what about the recovery rate, or how much you can expect to claw back if a company fails to pay on time? In its pricing model, JPMorgan made the key assumption of a 40% rate, based on the average over the last five years. This is too simplistic.

Consider China, where the bank sees 78% of Asia’s defaults next year. A five-year average says nothing about the future, because this figure has been falling off a cliff. The recovery rate went from 83% in 2014, when defaults first started to appear, to just 31% three years later, data provided by Ping An Securities Co. show. It was even lower in 2018 and 2019 when money was tight, amid the trade war and Beijing’s deleveraging campaign.

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