(Bloomberg) -- Investment-grade corporate bonds in Asia outside Japan are set to post their worst performance in eleven months in September, hurt by high US interest rates, rising energy costs and China’s ailing economy. 

A Bloomberg index of dollar-denominated bonds in the region has lost nearly 1.6%, its worst monthly showing since October 2022. 

The losses are part of a broad setback for global bonds from the Federal Reserve’s higher-for-longer interest rates stance. Investors in Asia face an additional challenge from the years-long real estate crisis that’s dragging on the world’s second-largest economy and rippling through financial markets. Bonds from Hong Kong and China together constitute more than half of the Asia investment-grade index. 

“Interest rates are a key watch item for global credit, given transmission risk to the economy and issuers’ financing costs and cash flow,” wrote Fitch Ratings Inc. analysts Carla Norfleet Taylor and Emmanuel Bulle. “Low speculative-grade rated issuers are most at risk from rising interest rates.” 

The real estate crisis in China has intensified even as officials took numerous steps to rescue the sector. China Evergrande Group said its chairman is suspected of committing crimes while Country Garden Holdings Co. is struggling to repay its debt and avoid a default. The sector’s ailments are overshadowing signs of recovery in other parts of the economy. 

Longfor Group Holdings Ltd. and Ping An Real Estate Co. led declines in a China investment-grade dollar bond index this month. Bonds issued by both builders have lost more than 16% in September, the index shows.

While officials in Beijing have made some progress, “I don’t think investors are fully convinced,” Robin Xing, China chief economist at Morgan Stanley, told Bloomberg Television’s Yvonne Man and David Ingles. “You need some more decisive policy to break this debt-deflation loop.”  

--With assistance from Alice Huang.

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