S&P warns of correction as Asia bond spreads hit decade low

HONG KONG (BLOOMBERG) - The trend of falling premiums on Asian bonds amid abundant liquidity may not last for long, as global monetary stimulus will inevitably fade, according to S&P Global Ratings.

"A significant correction in prices of assets such as bonds, equity, and real property, is likely," the ratings firm said in a note dated Sept. 26. "Abundant liquidity and steady yields have desensitized markets to tail risks, which could shock markets if they were to occur."

Global markets are interconnected and the Asia Pacific region could take its cue for a price correction from elsewhere, according to Terry E Chan, the primary analyst on the report, who spoke by telephone. The quest for yield has pushed spreads on Asian investment-grade dollar bonds to just 167 basis points over Treasuries, near the lowest since late 2007.

"While the specific trigger of a market pullback is uncertain, a liquidity withdrawal is inevitable given the near decade-long era of easy money," S&P Global Ratings said in a report Wednesday. "The potential for sharp corrections in asset prices has spiked." Distressed scenarios will likely rise in Asia as the region's outstanding debt has grown rapidly, according to Jay Wintrob, chief executive officer at Oaktree Capital Group. 

"Growth in debt creates leverage, which can be very, very good and very, very bad," he said in an interview this week. "Leverage in Asia has increased." Rising threats include market overreaction to geographic conflicts such as North Korea's missile testing, the rise of populist or extremist trends, and tax or trade wars, according to S&P.