Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Investors might worry about the risks of investing in Chinese bonds, but the makeup of the Asian high yield bond market has changed.
“The make-up of the market has transformed, and with it the risk profile,” said Tae Ho Ryu, Portfolio Manager, Fixed Income, at Fidelity International, in a market note. While in 2019, about a third of bonds listed at the JPMorgan Asia Credit Non-Investment Grade Index (JACI NIG) came from Chinese property companies, this number shrunk to only 4%. “The market is stronger – no longer heavily dependent on the fate of a single sector, with a more balanced and diversified pool of issuers,” opines Ryu.
After 2021 and 2022 proved difficult for the Asian high yield bond market, things started to improve last year. So far in 2024, Asia’s high yield bonds have outperformed global peers, gaining 6.8% (as of March 29, 2024).
“Asia high yield bonds offer higher returns than their peers: the average yield-to-maturity is 10.7%, compared with the 8.4% for similar bonds in broader emerging markets and 7.4% in the US,” said Ryu. “There are reasons for this premium: Chinese names still make up almost a third of the market, and there are still concerns over the fate of both the Chinese economy and the regulatory backdrop.”
Asia High Yield – outlook has improved
The portfolio manager of the KraneShares Asia Pacific High Income Bond ETF, Wai Hoong Leong, sees the credit cycle for Asia high yield in its recovery phase. “Fundamentals for Asian credit remains supportive,” he said in a Q&A with Kraneshares. “Although defaults have up to this point been driven by Chinese property issuers, which were far ahead in the downturn of the credit cycle, default rates for the rest of Asia ex China remain at healthy levels, and at below forecasted levels for US high yield (HY),” he added.
Pimco believes the fundamental outlook and sentiment for high yield names outside the property sector has noticeably improved. “Asia credit spreads have tightened by about 50 basis points for the overall market and 200 basis points for high yield, outshining most global credit benchmarks,” said Stephen Chang, Portfolio Manager, Asia, at Pimco.
As Chang explains, the tightened spreads signal that investors feel more confident about the market. “They are willing to accept less excess return for taking on greater risk. This tightening of spreads has been a major contributor to the excess returns for the Asia credit market,” he added.
Pimco expects a more stable market ahead. “The market’s appetite for risk appears to be returning,” said Chang.
