Asian bond funds launched as investors chase higher yields
Two Asian bond funds launched in Hong Kong last week, as fund managers expect Asian investors to continue their yield search in 2017 in the belief that Asian central banks will maintain their easy monetary policy even in the face of rising rates in the US.
Higher returns, shorter maturity, and low default rate of US dollar-denominated Asian bonds will attract the region’s investors, HSBC Global Asset Management’s head of Asian credit Alfred Mui said.
He manages the HSBC Collective Investment Trust - HSBC Asia High Income Bond Fund, which was launched on February 13. BEA Union Investment launched its Asian Strategic Bond Fund a day later.
Among the investment grade bonds, the J.P. Morgan Asia Credit Index yielded 4.09 per cent annually by January 23, compared with 3.34 per cent for US benchmarks and 0.99 per cent in Europe, according to data collected by HSBC.
The Asian bonds index’s duration is 5.29 years, compared with 6.94 years in the US and 5.27 years in Europe.
“The majority of Asian bonds are short dated, which will be less impacted by US treasury yield movements, offering investors a cushion against US interest rate rises,” Mui said.
Mui believes the default rate will remain low, given that economic growth in Asia remains strong, after Asian high yield recorded less than 1 per cent in 2016.
Demand for hard currency Asian debts remains robust, as institutional investors love the fundamentals of Asian markets but are concerned about the volatility of local currencies, said Pictet Asset Management’s senior client portfolio manager of emerging market debt Andrew Grijns.
More than 70 per cent of US dollar Asian bonds were bought by Asian investors, including mainlander Chinese investors who tend to allocate more US dollar assets amid the yuan’s depreciation, Mui said.
The net issuance of the hard currency Asian bonds will continue to drop this year to between US$50 billion to US$60 billion, Mui said.
Inflation has been one of the biggest concerns in the bond market, as accelerating inflation offsets returns. However, the inflation rate in mainly Asian countries and emerging markets are falling, Grijins said.
However, analysts were cautious against China’s onshore bonds market although Chinese regulators allowed greater access in the market.
“Although it’s now easier for investors to get access to China’s bond market, in some way it’s harder to get out, and China has been cutting rates over the years until recently, so the yield has been less attractive than previously,” Grijns said.
As the Chinese yuan is expected to depreciate further over the next one to two years, the local bond market is not very attractive compared with other opportunities in emerging markets, he said.
Mui said he is looking for better entry point to onshore market, as China is recently tightening the liquidity to squeeze the bubble in financial market.
Mui’s fund has a quarter of exposure in China market, but almost all the assets are in US dollars.