Asian investors are piling into US investment grade debt as issuance hits record levels, despite managers in the sector underperforming benchmarks in the first quarter.
Investors from the region allocated a net $1.37 billion into US investment grade debt in the first quarter of this year, following net outflows of $9.08 billion during 2019, according to data provider eVestment.
On 23 March, the Federal Reserve pledged to start buying corporate bonds, causing spreads in investment grade bonds to narrow considerably. US investment grade bond yields on the Bloomberg Barclays US Corporate IG Index peaked at 3.41% on 23 March and stood at 1.96% on 18 May, according to Bloomberg. The 12-month average spread is 1.29%.
Stephen Chang, Hong Kong-based portfolio manager for Asia at Pimco, said that falling prices, widening spreads and the intervention by the Fed in March made US investment grade bonds attractive to institutional investors, who have been increasing allocations.
“In April we saw buy-and-hold investors such as insurance companies and financial institutions in Asia buying high-quality US dollar investment grade bonds in the US and Asia. Institutions saw the widening spreads and began deploying some of their capital. Versus a year ago, spreads were more attractive and able to surpass their required hurdle”.
He said that while spread recovery will be uneven, the aggressive Fed action should suppress the bond volatility seen earlier in March and allocations should continue.
“In order to achieve income, credit spread exposure will need to be strongly considered given where government bond yields are.”
Fabrice Chemouny, Asia Pacific head of Natixis Investment Managers, told AsianInvestor that Loomis Sayles, an affiliate of Natixis, has received new active US investment grade mandates from sovereign wealth funds, pension funds and life insurers in Asia Pacific, including China and Japan.
As of earlier this month, he added, new flows for 2020 were above the equivalent period in 2019, and the flow of new mandates is continuing at a steady rate. He declined to offer any detail on the volume of the flows.
The likes of Japan’s Nippon Life, Dai-ichi Life, Japan Post Insurance, T&D Holdings and Sumitomo Life have either already started increasing allocations to foreign investment grade credit or plan to do so in the coming 12 months, and observers say US investment grade is likely to be their primary target. Executives from Nippon Life, Japan Post and Sumitomo Life did not respond to requests for confirmation or comment from AsianInvestor.
All-told, US borrowers have issued $951 billion of investment grade bonds in the year to May 15, up 89% on the same period in 2019 and the highest number for this period on record, according to Credit Flow Research in Boston. Almost two-thirds ($620 billion) of this volume was issued since March 23.
Rich Familetti, chief investment officer of the $9 billion Total Return Fund at SLC Management in New York, said the record issuance in the US IG corporate bond market has been absorbed by long-term investors looking for steady income.
“Despite spreads coming down from the middle of March, demand is strong and comes from US institutions and insurance companies, including those in Asia.”
Familetti has increased his fund’s allocations to US investment grade corporate bonds and US taxable municipal bonds in recent weeks, while cutting Treasury allocations. In corporate bonds he has focused on industrial and defence sectors and some technology names, while looking to Texas, California and Massachusetts for taxable municipal bonds.
He said the latter were particularly attractive to long-term investors, including those from Asia.
Despite the growing allocations, managers in the US investment grade sector underperformed the Bloomberg Barclays US Corporate IG Index by -0.65% in the first quarter – the index fell 3.63% in the period. By contrast US high yield managers beat the BofA ML US High Yield Master Index by 0.71% over the period, although the index fell 13.12% during the period [according to a report by bFinance published in May].
Kathryn Saklatvala, London-based head of investment content at consultancy bfinance, said the relative underperformance of US investment grade managers was because they entered the year generally more aggressively positioned than their benchmark indices, while high yield managers were more conservatively positioned.