Why Asia bonds remain resilient in a rising-rate environment | Partner Content

As rising inflation, interest rates and geopolitical risks cast a shadow over global bond markets, Asian corporate bond spreads have widened in tandem with global risk aversion but are still in line with other markets.

However, Asian bonds – both IG and HY segments – have a differentiated risk profile compared to their peers and offer investors a relatively stable and attractive source of yield and diversification at a time of great uncertainty.

Attractive returns with a shorter term

In this environment of rising interest rates, Asian bonds offer the advantage of being shorter in duration than their US and global aggregate counterparts in both IG and HY. For example, Asia IG has approximately three years shorter duration than US IG but offers a higher yield. Similarly, a comparison of US HY and Asia HY underscores the latter’s shorter duration but with almost double the yield.

This combination of higher yield and shorter duration helps portfolios absorb the effects of interest rate changes. Active duration management at portfolio and security level should minimize the risk of bond value erosion and potentially enhance returns.

Advantage Asia: shorter term with better returns

Source: Bloomberg, PineBridge Investments, as of March 31, 2022. For illustration purposes only. We do not request or recommend any action based on this material.

Low correlation to US Treasuries

In the medium to long term, we believe the rising interest rate cycle will have a modest impact on Asian credit. Over the past 10 years, the interest rate sensitivity of Asian IG bonds has been R2 0.5, indicating a moderate correlation.

Within the Asian HY segment, the sensitivity is negligible at 0.0003. This suggests that Asian bonds should be cheaper to hold than US bonds, especially at the start of a tightening cycle.

Historical correlations between Asian bonds and US Treasuries

Source: PineBridge Investments as of April 4, 2022. For illustration purposes only. We do not request or recommend any action based on this material.

Credit spreads for the HY sector continue to trade at historically high levels on ongoing concerns in the Chinese real estate space. However, as the correlation to US Treasuries is extremely low, the broader credit spreads within the segment should provide a buffer to offset the rise in interest rates.

Stable credit fundamentals

Key credit metrics for Asian companies are stable or improving and fundamentals are expected to remain strong as Southeast Asia and South Korea emerge from Covid. We believe this environment will support a bias for spread tightening versus US bonds.

Credit metrics for Asian companies remain healthy

Source: Bloomberg, JP Morgan, as of January 31, 2022. For illustration purposes only. We do not request or recommend any action based on this material.

Although China is an important part of the Asian bond universe, the market offers a variety of issuers with different credit profiles and from different markets. The US dollar-denominated Asian IG market has grown to nearly US$1 trillion1 by market capitalization and includes high-quality issuers from emerging markets such as Indonesia and the Philippines, as well as developed economies such as Singapore, Hong Kong and South Korea.

The strong presence of quasi-sovereigns is a key feature of the Asian IG market, unlike its global peers. Fallen angel risk in Asia IG also remains low relative to peers and potential credit events are limited to certain government bonds and Covid-hit sectors such as gaming.

Similarly, Asia HY has also undergone rapid expansion in recent years; although recent negative headlines, particularly from the Chinese real estate sector, have put pressure on the market and its market cap has fallen in recent quarters.

However, we believe the sector has been oversold of late, offering attractive risk/reward profiles from higher quality issuers with stable fundamentals and no funding pressures.

While risks to Chinese growth have increased in recent months, monetary easing is now expected to become more aggressive as the year progresses. We believe this backdrop has led to greater price dispersion and highlighted opportunities, particularly in higher quality names, which we believe will benefit more from this change in direction.

The HY market is also sufficiently diversified, offering credit selectors diversity beyond large Chinese real estate issuers.

Limited impact due to geopolitical concerns

Amid the market volatility triggered by the Russia-Ukraine conflict, we do not expect any direct impact on Asian economies and Asian bonds as trade between the two countries and Asia is relatively light.

However, short-term risk aversion and fund outflows may occur in the Asian bond market. In our view, Asian IG and non-Chinese HY bonds will remain resilient and not face liquidity issues. Select commodities and energy-related assets could experience increased demand due to supply disruptions, which could bode well for some industries in Asia.

For example, high coal prices could benefit the Indonesian coal sector. Meanwhile, markets like India, which is a net oil-importing economy, could experience a greater impact on its public finances and economic activities from the rise in oil prices. We will continue to actively monitor the ongoing impact of commodity prices at the government and corporate bond level.

Given the prevailing uncertainty, we believe it is time for investors to consider allocations beyond global benchmarks. With flexibility and discipline, active management should allow investors to expand into new markets and uncover exploitable gaps between fundamentals and prices in overlooked segments, while potentially protecting portfolios from volatility.

With highly competitive yields, low interest rate sensitivity and strong fundamentals, a carefully selected portfolio of Asian bonds should provide investors with a robust solution to the challenges ahead.

For more information on PineBridge Investments’ Asia bond solutions, visit www.pinebridge.com.

1 – Source: JP Morgan, as of February 25, 2022

All investments involve risk, including the loss of the principal amount invested. Past performance is not a guide to future results. All views expressed are the manager’s and are subject to change. We do not request or recommend any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited. This document has not been reviewed by the Securities and Futures Commission (SFC). Investors should note that the site www.pinebridge.com and any other websites referenced in this document have not been verified by the SFC and may contain information about funds that are not authorized by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by MAS. Investors should note that the site www.pinebridge.com and any other websites (including any content contained therein) referenced in this document have not been reviewed or approved by MAS.

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