Five years of global credit crises and lackadaisical global economic growth have had one good outcome: debt markets have been on a prolonged rally.
One might ask how much longer this rally will continue and whether it’s time to think about switching into equities.
The UBS CIO Wealth Management Research house view is clear on the point: there is more life in the Asian bond rally.
This discussion involves a slight technical detour. There are two basic components to bond pricing: the benchmark and the spread over the benchmark. For US dollar bonds, even those issued by Asian firms, the benchmark is almost always US Treasuries, or US government bonds.
The spread is a measure, in basis points, of how much a given bond pays in terms of yield over the benchmark. On these criteria, Asian bonds look well-positioned.
For example, thanks to continued interventions by US Federal Reserve chairman Ben Bernanke, we expect 10-year US Treasuries to yield just 1.7 per cent by the year’s end. This low yield will drive investors into other instruments, such as Asian bonds.