Ma Linlin says a lack of liquidity in the bond market is likely to be only short-lived
Loose monetary policy in Asia is expected to push up the price and returns of local-currency bonds, portfolio managers told a conference last week.
In addition, high yield is likely to be favoured over investment-grade debt in the local-currency bond markets, the audience heard at last week’s Borrowers and Investors Forum, organised by FinanceAsia and AsianInvestor.
It comes as Japan continues its extensive monetary easing to drive down the yen, while China cut interest rates late last year and last week reduced the amount of capital its banks had to hold. India, Korea and Australia have all cut interest rates since last October.
“Investing in local-currency debt is a chance to catch monetary policy loosening,” said James Su, investment director at Haitong Asset Management (Hong Kong), noting that longer-duration investments were best placed to do so.
In the midst of a highly volatile bond market in Asia, Ma Linlin, Hong Kong-based portfolio manager at Prudence Asset Management, told the forum that a lack of liquidity was partly to blame. However, she said such illiquidity was likely to be short-lived.
Strengthening research capabilities should be the highest priority in fighting market volatility, she added. In addition, she highlighted the limitation of downside risk when it came to managing foreign exchange risk.
“We’ve been actively managing the FX risk since volatility picked up since last year using options and forwards,” said Ma.
The situation has been partly of China’s own making. Beijing sanctioned a rise in FX volatility with the doubling of the People’s Bank of China’s daily band for fixing the onshore renminbi exchange rate last March. Following the change, the RMB was allowed to trade up to 2% either side of a daily central bank reference rate.
The trading band has been gradually widened in recent years, but in 2007 the renminbi was still only allowed to trade up to 0.3% either side of the reference rate. However, greater FX volatility has not been accompanied by less enthusiasm for renminbi-denominated assets.
Both Su and Ma were optimistic about the outlook for the Chinese currency and saw a rising number of US and European investors diversifying into renminbi assets. At the same time, more onshore clients were viewing the dollar as a hedge against renminbi depreciation.
Given the market consensus is for the US Federal Reserve to raise interest rates this year, leading to a stronger dollar, purchases of the American currency are being used by Chinese investors as a cheap hedging tool against renminbi depreciation.
Digging deeper into the asset class, Ma and Su noted that dollar-denominated opportunities were more obvious in investment-grade debt than in high yield, with US interest rates expected to rise and credit spreads set to narrow.
The emerging-market premium on Asian investment-grade debt had narrowed, said Su, and yields were “very tight”, similar to the situation in the US. This was leading to shorter-duration dollar-denominated investments to reduce interest-rate risk in anticipation of US interest rate rises and to capture as much of the credit spread available on EM bonds as possible.
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