Halbis Capital Management, the active-investment arm of HSBC Global Asset Management, has moved to a much more cautious stance in its Asian fixed-income portfolios, says Cecilia Chan, COO and Asia head of fixed income in Hong Kong.

The happy but dull days of low volatility and high yields in Asian fixed income between 2002 and 2006 are over for now. The asset class has evolved, thanks to Asia's strong economic fundamentals, and today local currency bonds attract investors seeking a haven from problems in the US û in other words, as a way to play the 'decoupling' story.

But Chan warns the problems of the US credit crunch are seeping in to Asia and are likely to keep spreads wide relative to US Treasuries. While over the long haul this is a buying opportunity, the more immediate future could offer wider, not tighter spreads.

Chan says it's difficult to identify consistent trends in Asian fixed income right now. She relies more on short-term trading ideas to deliver capital gains. As trading volumes decline, liquidity is thinning, forcing bond managers into defensive strategies.

The biggest change in the market that has emerged this summer is the end of the Asian currency appreciation story. This was the dominant secular trend for the past few years, with the Chinese renminbi having appreciated 10% against the US dollar just this year alone. With Asian fundamentals likely to weaken, it is no longer obvious that these units are overvalued.

As a result, her portfolio is now almost entirely in US dollar-denominated instruments (96.9%) with tiny bits of ringgit, Singapore dollars and even Russian rubles.

Her exposure to active risk is also limited. Instead, she is playing on the safe side with carry yields in hard-currency debt. Chan says she is underweight on sovereign debt across the region for unclear outlooks for political and monetary policy, but is keeping an overweight toward investment-grade corporates in selective Singapore financials and Hong Kong properties.

In Korea, the risks of inflation and currency have been fully priced in. Korean quasi-sovereign issues are another flavour of late. High-yield destinations such as the Philippines and Indonesia are not out of the woods with inflation, and Chan expects their interest rates will rise, making them currently unattractive to bond investors.

As of end of July, ChanÆs portfolio has an average duration of 5.55 years and a credit rating of BBB+. She has a 62% allocation to investment-grade corporates, 10% to high yield-corporates, 7% to investment-grade sovereigns, another 20% to high-yield sovereigns and 1% in cash.