Asian dollar bond rally could extend its run, propelled by yield-seeking investors

The recent rally in Asian dollar bonds has room to run further as yield-seeking investors scramble to get exposure to this asset class with interest rate cuts looming on the horizon, fund managers said.

The yield premium on Asian dollar bonds - compensation for the credit risk - has tightened for four straight weeks and touched a fresh record low on Wednesday, according to a Bloomberg index tracking both investment-grade and high-yield bonds. Junk-rated bonds from Chinese issuers are among the biggest gainers with a 5.2 per cent return this month, an ICE BofA Index showed.

Supporting factors, which include positive technicals due to low issuance, improving macro conditions in the region and Beijing's recent property rescue package will also help sustain demand, fund managers said.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

"We expect Asia dollar bonds' credit spreads to hold up well", barring negative surprises from US macro, geopolitical events and China's policies, said Cary Yeung, co-head of emerging market corporate and head of Greater China debt at Pictet Asset Management.

Yeung, who co-manages the firm's US$753 million emerging corporate bonds fund, has recently moved his fund to overweight on Asia's high-yield bonds, including those sold by Chinese developers which are not in distressed situations, described as businesses that are at risk of, or already have defaulted on their debts. Investment grade bonds issued by property developers could also outperform as they may be the first to benefit from the stimulus policies, he added.

Nigel Foo, Head of Asian Fixed Income of First Sentier Investors, is pictured at Central. Photo: Yik Yeung-man alt=Nigel Foo, Head of Asian Fixed Income of First Sentier Investors, is pictured at Central. Photo: Yik Yeung-man>

For First Sentier Investors, a fund house with US$157 billion of assets under management, investment grade bonds are the top pick. All-in yields are still attractive, and the asset stands to benefit from capital gains as well if growth risks spike. Interest rate-sensitive bonds like investment grade credits tend to experience a greater positive impact on total returns when rates peak.

"It's a very interesting entry point for people to start looking at bonds, especially for investment grade bonds," said Nigel Foo, head of Asian fixed income at First Sentier. A move lower in US interest rates could drive a high-single-digit total return for the segment through the year-end, while capital gains could increase if growth risks emerge, he added.

Bonds issued by Hong Kong companies, especially deep-pocketed developers, are among Foo's top picks as they have weathered many downs-cycles. Meanwhile, US dollar-denominated bonds issued by China's state-owned enterprises and tech leaders are also favoured due to their strong fundamentals, he said.

To be sure, the market could take a breather after the recent tightening of credit spreads. However, any dovish signs from the US Federal Reserve at the June meeting could provide relief for Asia as lower domestic rates could lead to steady inflows into bond markets, according to fund manager Fidelity.

Retail investors in Hong Kong have been piling into bond products this year as they bet the aggressive rate hike cycle has come to an end, and are rushing to lock in to elevated yields. Fixed-income funds were the most popular among all the mutual funds during the first quarter this year, pulling in US$4.1 billion of inflows during the period, according to data from Hong Kong Investment Funds Association.

"We see for most of the Asian economies that inflation is manageable ... and the central bank is well positioned for the coming rate cuts," Lei Zhu, Fidelity's Asia head of fixed income, said during a webinar on Wednesday. The markets expect a brighter second half of 2024, she added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.