Global fixed income repricing creates opportunities for Asian bonds
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Rising interest rates have created challenges for global fixed income markets, but the resiliency and solid fundamentals of Asian bonds still provide investors with long-term opportunities.
US Treasury yields have risen due to a stronger US dollar, increased inflation expectations, and the US Federal Reserve’s interest rate actions. The US 10-year Treasury yield rose above the closely watched 3% threshold in April and May, the first time it has done so in more than four years, and yields have hovered around the 3% level since1. Investor expectations have also evolved from that of quantitative easing to economic normalization, higher inflation, and rising interest rates after a decade of anaemic yields.
Historically, higher interest rates have dampened Asian bonds and a stronger US dollar weighs on Asian currencies. These factors have led to a substantial repricing of risk within the region’s bond markets since early 2018. Spreads have widened and Asian credits have become more differentiated. In other words, the “easy carry trade” has ended and capital outflows have increased. Returns from buying into bond markets for “yield-pick up”, while ignoring economic and credit fundamentals, have dried up.
Asian Bonds Stand Out
However, Asian fixed income still stands out as a compelling option in this complex market environment. The Asian fixed income team at Manulife Asset Management believes higher Asian bond yields and wider Asian credit spreads can still provide investors with attractive investment opportunities. Asian economies display higher rates of growth and stability than many other emerging markets, as well as a better external position. Asia’s higher credit ratings also rank it above other emerging markets.
