Stick with the trend is the message for investors in US dollar bonds issued by Asian firms. Despite sharp price rises as yields have shrunk towards benchmark levels, the possibility of further gains remains, according to analysts.
Since last year the spread between investment-grade Asian bonds and benchmark yields has compressed by 30 to 40 basis points on a tide of rising investor risk appetite and an improving regional economic outlook.
'It is still possible the spread will be tightened by a further 20 basis points in the next 12 months,' said Ben Yuen, head of fixed income at First State Investments.
Credit spreads might look unattractive based on gaping levels of the past five years but compared with the premium commanded by Asian issuers through most of the 1990s, bonds offer good value, he said at a briefing for the launch of Asian and Hong Kong dollar bond funds.
The price of a corporate bond issued in US dollars depends on prevailing benchmark United States treasury rates and the 'spread' or corporate risk premium that investors ascribe to the company, based on its creditworthiness.
Bullish bond investors are betting that the US Federal Reserve will not increase interest rates until the second half of next year, keeping benchmark rates low and bond prices high.
'There might be a rate increase ... but gradually ... in the second half of next year,' said Brian Parker, chief economist of Asia Pacific excluding Japan at Citigroup Asset Management, adding that the rates would still be kept at a low level in the next two years.
