Asian dollar bond rally could extend its run, propelled by yield-seeking investors

The yield premium on Asian dollar bonds touched a fresh record low after tightening for four straight weeks, according to a Bloomberg index

Besides interest rate cut hopes, the rally is supported by low issuance volumes, improving macro conditions in the region and Beijing’s recent property rescue package

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Mainland Chinese tourists take photo of the skyline of buildings at Tsim Sha Tsui, in Hong Kong, China. Photo: Reuters

Published: 4:01pm, 30 May 2024

The recent rally in Asian dollar bonds has room to run further as yield-seeking investors scramble to get exposure to this asset class with interest rate cuts looming on the horizon, fund managers said.

The yield premium on Asian dollar bonds – compensation for the credit risk – has tightened for four straight weeks and touched a fresh record low on Wednesday, according to a Bloomberg index tracking both investment-grade and high-yield bonds. Junk-rated bonds from Chinese issuers are among the biggest gainers with a 5.2 per cent return this month, an ICE BofA Index showed.

Supporting factors, which include positive technicals due to low issuance, improving macro conditions in the region and Beijing’s recent property rescue package will also help sustain demand, fund managers said.

“We expect Asia dollar bonds’ credit spreads to hold up well”, barring negative surprises from US macro, geopolitical events and China’s policies, said Cary Yeung, co-head of emerging market corporate and head of Greater China debt at Pictet Asset Management.

Yeung, who co-manages the firm’s US$753 million emerging corporate bonds fund, has recently moved his fund to overweight on Asia’s high-yield bonds, including those sold by Chinese developers which are not in distressed situations, described as businesses that are at risk of, or already have defaulted on their debts. Investment grade bonds issued by property developers could also outperform as they may be the first to benefit from the stimulus policies, he added.

Nigel Foo, Head of Asian Fixed Income of First Sentier Investors, is pictured at Central. Photo: Yik Yeung-man

For First Sentier Investors, a fund house with US$157 billion of assets under management, investment grade bonds are the top pick. All-in yields are still attractive, and the asset stands to benefit from capital gains as well if growth risks spike. Interest rate-sensitive bonds like investment grade credits tend to experience a greater positive impact on total returns when rates peak.