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:

  1. Competitive yields – even with generally lower duration
  2. A growing opportunity set – as per the growth in volume and diversity of green bonds
  3. 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.

3. Diversification

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.

Click here to learn more about HKD bonds


Hong Kong offers better yield for a shorter duration in the context of high grade Asia while US spreads have become super tight

Important information

For professional investors and intermediaries only. This document should not be distributed to or relied upon by retail clients/investors.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

This document has not been reviewed by the Securities and Futures Commission.

HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited.

Copyright © HSBC Global Asset Management (Hong Kong) Limited 2021. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited.