Emerging Asia bonds lose favour amid elevated US interest rates

Asset owners have been taking note and diverting their portfolios to products with higher yields.
Emerging Asia bonds lose favour amid elevated US interest rates

Sovereign bonds in Asia’s emerging markets seem less attractive than before, against a backdrop of raised interest rates in the US and other developed countries.

Chuan Lim
Swiss Re

Swiss Re is among those asset owners that have readjusted their appetite to emerging markets, according to Chuan Lim, head of Asia and emerging markets investment strategy at Swiss Re Asset Management.

“With higher yields and a stronger dollar, that hasn’t been great for EM (emerging markets), [not to mention] the geopolitical risks and sanctions that have happened around the world,” Lim said on stage at AsianInvestor’s Insurance Investment Briefing Hong Kong on March 19.

Instead, the reinsurer is focusing on redeploying cash and reinvesting coupons into US investment-grade fixed income, where it can find yields above 5%.

“We don't think that the current scenario is commensurate with the premium EM bonds may offer and the risks that we have to take,” Lim said.

Around 85% of Swiss Re’s $110 billion portfolio is in fixed income.


Cathy Hepworth
PGIM Fixed Income

With low yields in general and very limited room for monetary easing, Asian local currency sovereign bonds do not offer attractive risk premiums, according to Cathy Hepworth, head of emerging markets debt at PGIM Fixed Income.

“On a currency unhedged basis, India is the only country where due to technical factors such as index inclusion flows, demand for Indian government bonds is likely to remain strong for the next 3 to 6 months,” she told AsianInvestor.

In other Asian countries, yields are too low, and Hepworth does not expect Asian central banks to embark on a deep rate cutting cycle without the Fed doing the same.

The best opportunity looks to be within emerging markets’ hard currency sovereigns: government bonds issued by emerging market countries in stable currencies like US dollars. 

“Additionally, the persistent weakness of Asian currencies against the US dollar is also a limiting factor for the unhedged bond positions. We do like currency-hedged China and Thailand bonds though,” Hepworth said.

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