Asian insurance firms, including tactical buyers in Taiwan, have been increasing their allocations to high yield bonds, and some have also been lengthening duration in their investment grade bond holdings amid coronavirus-related volatility, say fund managers.
Ed Collinge, global head of insurance strategy at Robeco, pointed to active opportunistic buying by Taiwanese insurers through mandates held by the company in response to volatility in the spring.
“There was a significant increase in allocations – of more than 10% in many cases – by Taiwanese insurers to high yield corporate bonds that started in March and April,” said London-based Collinge. Most flows have been into existing mandates rather than new ones, he added, thanks to the constraints on meeting new managers during the pandemic.
Following rapid spread widening across bond markets globally during March, spreads on high yield bonds narrowed slower than those on investment grade debt, leaving opportunities for opportunistic buying, Collinge said. “Taiwanese insurers felt that they were therefore more than compensated for the greater credit risk in high yield.”
Taiwanese insurers are often tactical in their bond allocations, so are likely to take advantage of short-term opportunities, he added. These tend to be concentrated in the US market, which accounts for roughly two-thirds of global high yield issuance, he said.
In mid-May, when US investment grade spreads fell below 2%, US high yield spreads were still above 7%. The Bloomberg Barclays US Corporate High Yield index began the year at 3.15%, peaked at 11% on March 23 and stood at 6.00% on July 6.
HIGH YIELD HUNT
Meanwhile, insurance firms generally have been buying more high yield fixed income this year, particularly Asian bonds, said Andries Hoekema, London-based global head of insurance segment at HSBC Global Asset Management.
“Particularly in Asian high yield we have seen insurers globally picking up on very attractive expected returns, [of] 7.4% over 10 years, according to our latest [data on] expected returns.”
Three-quarters of the universe of HSBC Global AM’s global high yield index comprised bonds from China, Hong Kong, Korea, Singapore and Taiwan, he noted. These are all countries the firm rated highly as “fortress emerging markets” on account of their relative resilience and positioning for recovery in the wake of the Covid-19 outbreak.
Insurers have boosted Asian high yield allocations mainly via fund investments following the Covid-19 outbreak, Hoekema said, declining to give details of how much.
The period between mid-March and the start of July has been one of the few since the implementation of Europe’s Solvency II regime in 2016 when returns available from parts of the high yield market have been enough to cover the additional regulatory capital that insurers must put aside relative to investment grade bonds, according to data from HSBC Global AM.
And many Asian insurance markets, including China and Japan, have adopted risk capital frameworks comparable to Solvency II.
European insurers, too, have been expressing greater interest in high yield since April as the focus of conversations turn from caution at prospective defaults to the prospects of improved yields said Valérie Stephan, head of European insurance strategy and analytics at JP Morgan Asset Management.
“We have seen an increase in requests from clients about the asset class and where to allocate at the moment,” she said, but these conversations have not yet resulted in allocations.
SEEKING LONGER DURATION
Some Asian insurers have also taken advantage of widening investment grade corporate bond spreads to increase duration in their fixed income portfolios.
Frank Yuen, a senior analyst at rating agency Moody’s in Hong Kong, said Covid-related volatility had led to Asian insurers buying more long-dated investment grade corporate bonds, in part to minimise duration mismatch in view of the low-interest-rate environment.
Remmert Koekkoek, head of insurance and pension solutions at Robeco in Rotterdam, has seen the same trend. “In March and April many Asian insurance companies did switch to lengthen duration,” he said, in what was an opportunistic move rather than a strategic overhaul.
Asian insurers are keen to lock in yields through IG long-dated bonds following the spread widening since March, agreed Stephen Chang, Hong Kong-based portfolio manager for Asia at Pimco.
Beneficiaries include Chinese internet companies and oil and related sectors in Thailand. “Sovereign and quasi-sovereign bond issuers have also had a very good reception from insurers,” Chang said.
Investment grade bonds have made strong gains, helped by the US Federal Reserve decision to start buying corporate bonds on March 23, which caused spreads in investment grade bonds to narrow considerably. Overall, investment-grade credit has returned 15.7% since the Fed intervention, according to an index compiled by Ice Data Services.