BONDS: High-yield trading volumes tipped to rebound


The Asian bond market will produce more opportunities for distressed debt traders in the next two years as liquidity returns, said Michel Lowy, Hong Kong-based CEO of fixed income boutique SC Lowy.

High-yield bond trading volumes plummeted over the summer amid fears of widespread defaults as China’s economy cools and US interest rates rise. Prices plunged in tandem across the board, contributing to a dismal quarter for Wall Street trading revenues.

As a principal trader, SC Lowy suffered mark-to-market losses over the quarter, but Lowy remains optimistic that prices will rebound.

“We are excited about the prospects for the market in the next couple of years,” said Lowy, whose firm traded US$7.5bn of debt in its financial year ending September 30, a 50% increase on the previous year. “We are putting in more resources.”

Uncertainty over commodity prices and interest rates has dented appetite global for emerging-market risk, sending the iTraxx Asia investment-grade index to a multi-year high at the end of September.

That, according to Lowy, points to “indiscriminate” selling in Asian high-yield, creating opportunities for traders who can take advantage of quotes of 50 cents on the dollar because they have a longer-term view.

“The art is to figure out which ones are at 50 cents because of illiquidity, because investors have been selling everything, or which ones are at 50 cents because there actually is an issue there… and they are heading for a messy restructuring,” said Lowy.

“That’s what you see now. You typically see two phases – phase 1 where everything trades down, and phase 2 where some assets start to recover and others continue their dive. That’s much harder to analyse and predict unless you have a strong analytical bench.”

SC Lowy, set up by former Deutsche Bank distressed debt specialists in the aftermath of the financial crisis, is also broadening beyond its roots, most recently adding par loans to its trading capabilities.

Similar to distressed loans and high-yield bonds, Lowy sees an opportunity to gain market share in trading high-quality loans as banks respond to tougher capital requirements.

“We have seen two-way demand so far,” said Lowy. “Banks are increasingly managing their assets more proactively than they used to be.”

“There is liquidity around; there is no liquidity around for risk.”

Steve Garton

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