Junk Bonds From Asia Beat Most Everything Else: Credit Weekly

Money managers including T. Rowe Price Group Inc. believe Asian junk dollar bonds have further to run after outperforming almost everything else in debt markets this year.

Bloomberg
First Published16 Jun 2024, 12:51 AM IST
Junk Bonds From Asia Beat Most Everything Else: Credit Weekly
Junk Bonds From Asia Beat Most Everything Else: Credit Weekly

(Bloomberg) -- Money managers including T. Rowe Price Group Inc. believe Asian junk dollar bonds have further to run after outperforming almost everything else in debt markets this year.

The notes have returned 9.8% year-to-date compared with about 3% for global speculative peers and losses across much of high-grade debt this year, Bloomberg indexes show. The outperformance is driven in part by a rebound in Chinese junk debt from record lows as authorities in Beijing throw their weight behind steps to pull the nation’s property market out of an unprecedented slump.

Junk bonds around the globe have been outperforming better-rated peers for most of this year. Stubbornly high inflation has held back central banks in many countries — most notably in the US — from cutting interest rates, even if falling Treasury yields this week buoyed bond markets in general. Speculative-grade Asian dollar bonds in particular have rallied, after trailing their global peers in the wake of record defaults on dollar debt by Chinese property developers.

“There continues to be appeal in high yield, including in Asia,” said T. Rowe Price’s Leonard Kwan, a portfolio manager of the firm’s dynamic EM bond markets strategy. The Asian debt has “attractive all-in yields, a shorter duration profile and is exposed to a stabilizing and solid growth outlook for China and India respectively.”   

At this point, Chinese junk bonds also contain a much smaller share of property debt, which as a sector was once the biggest seller of speculative-grade bonds in Asia until a government-orchestrated crackdown on leverage begun before the pandemic triggered record defaults. After handing investors a cumulative 50% loss between 2021 and 2023, the Chinese notes have returned about 9.7% this year, a Bloomberg index shows.     

“You can’t ignore emerging markets because there are segments of EM doing phenomenally well,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management. “We do like China high yield, also an out-of-consensus bet.”

Away from China, Vedanta Resources proved one of the best performers this year, with some of its dollar bonds climbing about 50% as the miner benefited from higher commodity prices and a deal with creditors to extend some maturities. Meanwhile, several sovereign Pakistani bonds have climbed more than 30% this year, as sentiment about the government’s ability to repay its debt improves.  

Still, risks remain with some analysts saying that Chinese authorities need to do more to address the supply-demand mismatch in the housing market which has cast a shadow over the entire economy. Pakistan is also still struggling to recover and just raised taxes to bolster its chances of securing a new loan from the International Monetary Fund, which is critical for it to meet debt payments. 

With a large swathe of global fixed income generating losses this year, as the Federal Reserve holds rates on pause in the face of stubborn inflation, some investors such as Julio Callegari at JPMorgan Asset Management still favor Asian junk debt for earning income in a higher-for-longer environment.  

“There are still good opportunities in Asia high yield,” said Callegari, CIO of Asia Fixed Income at JPMorgan Asset Management, even without going into Chinese property debt. 

Excluding such bonds, the Asian credits still offer a “decent pick-up” of about 150 basis points versus developed-market high yield, he said.  

Click here to listen to Arcmont discussing private credit’s double-digit returns, which it says are here to stay.

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First Published:16 Jun 2024, 12:51 AM IST
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