The region’s bonds stand out in a world of low and negative yields, but investors need to be picky.
There was a time when negative yields were a rare and unlikely curiosity. No longer: in late 2019, as much as US$16 trillion of bonds worldwide carried a negative yield,1 although a more positive economic growth outlook means this number has since shrunk. Even so, plenty of debt still offers a meaninglessly low return.
So where to go?
International investors have been positioning for this opportunity for some time. According to AsianBondsOnline,4 just under 40% of Indonesian local currency debt was held by foreigners at the end of June 2019, around 23% of Malaysian ringgit, and just over 15% of Thai baht.
But it is not a free ride, and it would be an error to think of Asian debt as a homogenous block.
Even here, the plunge to lower yields seemed inexorable until recently. Sovereign bond yields in most Asian nations were expected to drift downwards, as central banks cut interest rates in order to spur economic growth, partly a consequence of the US-China trade war.
No shortage of opportunities
Regional analysts from private banks have been quoted as expecting a 3% total return from Asian investment-grade debt over the next 12 months, and 6% from Asian high yield.5 They judge short duration credits to be better, given the flatness of the yield curve, while a portfolio blending Asian investment grade and high yield should return over 4% in the next 12 months.
And there is certainly no shortage of supply. Borrowers know they are not going to see opportunities like this every day, which is why dollar bond issuance in ex-Japan Asia hit an all-time record of over US$79 billion in the third quarter, according to Bloomberg data.6