Asia to still outshine developed market bonds: report

Eastspring Investments, in a report on the viability of bonds as an attractive income option, stated that credit spreads of Asian U.S. dollar-denominated bonds were still above their lows, reflecting room for potential spread compression, which could support bond prices and mitigate the impact from the potential modest increases in U.S. risk-free rates.

Unlike the developed markets, countries like Malaysia and the Philippines had positive real interest rates.

“We believe the attractiveness of the Asian bonds are also continuing to find ground among investors, as reflected by the strong inflows into the Asian bond markets in the past years,” it opined.

It expects 2013 to continue technical support for Asian bonds, given the persistently strong demand by institutional investors, which include insurance, central banks and sovereign wealth funds, as they diversify away from the lower-yielding fixed-income holdings.

In the same statement, it said structural shift of retail investors towards emerging and Asian bond markets would continue, given their current low allocation to this region and the ongoing need to enhance yields for their fixed-income portfolio in today's low interest rate environment.

“Interest rate movements have less of an impact on this asset class than investment-grade credit since investors are compensated more for taking on additional credit risk,” it said.

Meanwhile, it said both in Asia and the United States, there was little need for high-yield companies to refinance in 2013, given manageable maturity schedules and the amount of refinancing that had been done since the 2008 financial crisis. High-yield companies had shored up their balance sheets and fundamentals remained intact.

Going forward, interest rates globally had declined significantly over the past three to five years and room for further capital appreciation could be more limited, it noted.

However, it said investors should bear in mind that as the global economy faced an extended period of fiscal consolidation and structural rebalancing, business cycles were in a “new normal” of lower average growth.

“Therefore, we believe that bonds should remain a part of a diversified investment portfolio and the benefits are best achieved over the longer run rather than attempting to time the market,” it pointed out.

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