Amid the shake-up and shake-out of many assets in global portfolios since the start of Covid-19, investor demand for Asian fixed income has remained strong.
At the crux of this is the significant yield gap on offer, across both investment-grade and high-yield debt. This is in response, in part, to US and European policy programmes created at the height of the uncertainty in March and April 2020.
“Asian assets were not in the purview of those central bank buying schemes, so didn’t see the same dramatic spread tightening [as in developed markets],” explained Geoffrey Lunt, director and senior investment specialist in the Asian fixed income team at HSBC Asset Management.
Instead, investors have been able to cherry-pick certain Asian credits at more attractive spreads, he added.
In short, to build on the region’s solid macro fundamentals, he sees three key drivers of Asian and HKD dollar bonds:
- Competitive yields – even with generally lower duration
- A growing opportunity set – as per the growth in volume and diversity of green bonds
- Diversification – as a result of low correlation to global bond markets
“Overall, now is a good entry point into Asian fixed income,” said Lunt, who was speaking at AsianInvestor’s annual Asian Investment Summit in early June 2021. “As one example, tight spreads in the US have also made HKD bonds unusually competitive.”
US and Euro credit trading well through long term average, Asia still wide
Why back Asian bonds?
1. Competitive yields
The yield premium in Asia has continued to grow during the pandemic, to complement the region’s growth story.
For example, credit spreads are alluring as Asia widens versus the rest of the world, plus the shorter duration of regional debt offers a notable benefit in today’s environment.
Yet China is the driving force in the ascent of Asia’s bond markets. “As Chinese debt has become increasingly attractive and diversified, it allows investors to take a dedicated, stand-alone allocation,” said Lunt.
This is reflected not just by opportunities in the higher-quality part of the market, but also in terms of high-yield debt.
In particular, China’s property sector continues to be robust, emerging relatively unscathed from Covid-19 to deliver record sales growth in 2020. The Chinese property market is highly regulated since the government needs to ensure stability in prices and demand.
“Despite some volatility in early 2021, the overall sector credit fundamental trend is improving on the back of the measures imposed,” said Lunt.
RMB bonds offer global investors a yield premium
Real yields in China are compelling
2. A growing opportunity set
More broadly across Asia, the bond markets have grown at double-digit rates over the last 20 years.
This can be seen via greater representation in global indices. “Asian fixed income is seen as a strategic allocation in its own right,” said Lunt.
In particular, green bonds are becoming an increasingly important source of issuance for Asia.
Hong Kong is a case in point. The $2.1 billion worth of green bonds launched locally last year represented a record number of deals from local issuers – with 15 internationally aligned green bonds and one green loan. Although the overall volume was down 18% from 2019, cumulative green bond issuance in Hong Kong has reached $9.2 billion overall.
Efforts to maintain this momentum include the launch of the new Green and Sustainable Finance Grant Scheme and further issuance of government green bonds. The aim is to attract more issuers, investors and service providers to the local market.
In early 2021, for example, in its most recent budget announcement, the government said it would issue roughly $23 billion in green bonds over the next five years, aiming to cover a larger variety of project types and bond features. As part of these initiatives, new financing tools including transition bonds and loans will have a vital role in new green growth and sustainable development.
Further, since HKD bonds represent a structural holding for many local institutions, rather than a speculative trade, HKD green bonds might be a good option for some issuers seeking diversity along with sustainability. “Issuers will find demand and can benefit from relatively low absolute cost of funding,” added Lunt.
This potential also highlights the benefit Asia can provide for investors in terms of credit diversification – what Lunt describes as the “silver bullet why many investors buy Asian fixed income”.
In fact, an important knock-on effect of the pandemic has been to underscore the lower volatility of Asian credit compared with much of the rest of emerging market (EM) debt. “Dramatic drawdowns in EM sovereigns during times of crises shows it is a much more volatile option than investing in Asia’s credit markets,” added Lunt.
This stems from the different ways in which Asian markets react, both to other EMs and also to global markets.
RMB bonds are evidence of this. In addition to the yield pick-up they provide, their correlation to other global instruments tends to be very low – sometimes zero.
With the threat of rising US treasury yields, investing in RMB bonds could be perceived as a safe haven, added Lunt. “Over the last five years, adding 6% China government bonds into a global portfolio has improved the quality of returns, even during a period of under-performance.”
In Hong Kong, meanwhile, a larger and more diversified market for HKD bonds also offers portfolio resilience that cannot be under-estimated in today’s environment.
Hong Kong offers better yield for a shorter duration in the context of high grade Asia while US spreads have become super tight
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