Investors bought dollar bonds issued by firms such as Alibaba and Baidu in May, soon after the market sold off following a U.S. announcement of higher tariffs on China and Washington's sanctions against Chinese telecommunications giant Huawei Technology.
"When things like trade war start to hit, the immediate reaction is to sell anything that's related to China," said Henry Loh, Asian fixed income investment manager at Aberdeen Standard Investments in Singapore.
Loh was referring to the broad selling in these bonds by the U.S. and other offshore investors as fresh worries about the technology sector, trade and economic growth jangled nerves.
Those who held onto bonds issued by Baidu, Alibaba and Tencent - known as B.A.T. on Wall Street - were rewarded as major central banks hinted at lower interest rates and trade talks resumed, lifting the value of the tech giants' investment grade-rated bonds.
"You need to get yield one way the other," said Wonnie Chu, managing director at Tencent-backed Gaoteng Global Asset Management, adding that bond investors had to either take greater risk buying the bonds of lower-rated issuers or go for longer-tenor investment-grade bonds.
Chu said she bought longer duration bonds issued by Chinese technology firms after the sell-off in May.
>Graphic: JACI - IG, non IG, agg, JPM EMBI, April-June 2019, rebased 100 -
Since their sell-off, the recovery in the bonds of Chinese internet firms has outpaced that of their U.S. peers.
The spread over comparable U.S. Treasuries on Alibaba's 10-year bond <01609WAT9=> has tightened about 40 basis points since early June and wiped out all losses since early May. It is now being traded at around 110 basis points above Treasuries.
Other assets directly in the firing line of the trade war, such as the share prices of Chinese tech firms and bonds issued by U.S. tech giants such as Apple Inc, have recovered far less.
The B.A.T. firms rely on domestic markets for the bulk of their revenues and will continue to do so, Fitch Solutions wrote in a report back in January.
Bonds of U.S. tech peers such as Apple, which have been hugely affected by tariffs and slowing Chinese growth, Amazon and Oracle are more expensive than those of B.A.T, at between 47 to 67 basis points above Treasury yields, even though the U.S. companies, on average, are rated just slightly higher - making the Chinese bonds a bargain.
"We added risk because they were really cheap compared with global peers," said Tiansi Wang, Hong Kong-based senior credit analyst at asset manager Robeco.
Graphic: Chinese tech 10-y T spread -
Graphic: U.S. tech 10-y T spread -
Strong financials also make Chinese tech bonds appealing, unlike their stocks that could be subject to volatility in earnings this year.
"The most important thing for credit investors is the health of the balance sheet. All of these companies have net cash balance sheet," Sheldon Chan, who manages T Rowe Price's Asia credit bond strategy.
Even unrated Huawei, whose revenues are taking a blow from a U.S. ban on component purchases, has a strong cash position and has seen its 10-year bonds rebound since May.
But Chan noted that hardware manufacturers remained more exposed to the trade war than internet firms, given their deeper integration with the global supply chain.
The rise of trade war risks could see investors get more aggressive. "We've always asked for a bit more valuation to compensate for it," said Wang.
Graphic: REFINED 2 - Alibaba, Tencent share, bond prices -
(Editing by Jacqueline Wong)
By Noah Sin