Asian dollar bonds are set to trail local-currency debt in 2013 for the first time in three years as a shrinking yield advantage versus Treasuries erodes their appeal, Pioneer Investments and UOB Asset Management Ltd. say.
Securities priced in the U.S. currency returned 1.5 percent this quarter as domestic debt delivered a 2 percent gain in dollar terms, according to indexes tracked by HSBC Holdings Plc. While global notes were the better bet in each of the last five quarters, their yield premium over U.S government debt narrowed 108 basis points this year to 267 basis points, the biggest contraction since 2009.
“The performance of local-currency markets in Asia will be superior to the returns of the external Asian debt,” said Yerlan Syzdykov, a London-based portfolio manager at Pioneer Investments, which has 153 billion euros ($199 billion) of assets under management, said in an interview on Dec. 10. “Spreads have significantly tightened in 2012 for external debt and there is limited room for further tightening.”
Pioneer likes Dim Sum debt as it expects further appreciation in the Chinese yuan, said Syzdykov. The yuan has climbed 0.9 percent versus the dollar this year and is expected to gain 1.6 percent by the end of 2013, according to analysts’ forecasts compiled by Bloomberg. Pioneer’s 729 million euro emerging-market bond fund returned 23 percent over the past year, beating 96 percent of its peers, data compiled by Bloomberg show.
International bonds outperformed domestic notes in the past two years as the global slowdown arrested regional currency gains. The Bloomberg-JPMorgan Chase & Co. Asia Dollar Index rebounded 2.5 percent in 2012, after 2011’s 1.1 percent loss. The 5.2 percent advance in 2010 was the biggest since 1998. The yield gap between Asia’s dollar securities and U.S. Treasuries averaged 357 basis points, or 3.57 percentage points, in the past five years and peaked at 843 in October 2008, the height of the global financial crisis.
Asian currencies will rise against the dollar in 2013, led by a 3.6 percent gain for the Philippine peso from current levels and a 3.4 percent jump in the Indian rupee, Bloomberg surveys of analysts show. The Hong Kong dollar and the yen are forecast to weaken versus the greenback.
The Philippines plans to cut its overseas debt-sale target by as much as 50 percent in 2013 to $1.5 billion and will instead sell more notes on the domestic market as it seeks to slow gains in its currency. Thailand is considering a plan to raise $1 billion to $3 billion by issuing dollar bonds for the first time since 2003 to fund water-management projects and prevent a recurrence of the nation’s worst floods in almost 70 years.
Emerging-market hard-currency bond funds attracted $33.8 billion this year through Dec. 6, while local-currency bond funds lured $13.81 billion, according to EPFR Global.
The yield premium on Asian dollar debt has narrowed as U.S. bond yields increased. The amount paid out on 10-year Treasuries has risen 31 basis points from a record low of 1.38 percent in July amid optimism a recovery in the world’s biggest economy is under way. The U.S. unemployment rate dropped to the lowest since 2008 in October and service industries expanded more than economists estimated in November, data last week showed.
President Barack Obama has lowered his demand for tax increases in the U.S. budget to $1.4 trillion from $1.6 trillion as he seeks agreement with Republicans to avoid the so-called fiscal cliff of spending cuts and higher taxes due to come into force next year. Lawmakers will probably reach agreement on the fiscal deficit and avoid a U.S. recession, according to Pioneer, UOB Asset and JPMorgan Asset Management.
The Federal Reserve said yesterday that it will buy $45 billion a month of Treasury securities from January in an expansion of its asset-purchase program.
“The U.S. economy is likely to be on a stronger footing as we expect the fiscal cliff to be avoided,” Chia Tse Chern, director and co-head of Asian fixed income in Singapore at UOB Asset, which managed about S$25 billion ($20.5 billion) of client assets as of Sept. 30, said in an interview on Dec. 5. “The Treasury yield is likely to rise slightly in 2013. We believe that several Asian currencies remain undervalued against the dollar and are likely to gain further in 2013.”
UOB Asset prefers Philippine peso bonds and Mongolia’s dollar debt, Chia said. His United Asian Bonds Fund returned 12 percent in 2012, surpassing the 4.6 percent average among peers.
The average yield on local-currency bonds was 3.59 percent yesterday after touching a record-low 3.56 percent on Nov. 19, while the average for dollar-denominated debt fell to an all-time low of 3.35 percent on Oct. 16 and was at 3.43 percent yesterday.
“More quantitative easing should lead to weakening of the dollar,” said Stephen Chang, managing director in Hong Kong at JPMorgan Asset, which managed $1.4 trillion globally as of Sept. 30. “Most Asian currencies will provide positive carry and good fundamentals,” he said in an e-mail on Dec. 4.
Chang, whose JPM Asian Total Return Bond Fund gained 13.5 percent in 2012 compared with an average of 4.9 percent among peers, likes the Malaysian ringgit and Indian rupee debt.
“The spread between the dollar bonds issued by Asian nations and Treasuries has been narrowing while local-currency debt still offers relatively high yields,” Tatsuya Higuchi, a senior portfolio manager at Kokusai Asset Management Co. which manages about $41 billion, said in a phone interview from Tokyo on Dec. 11. “With the funds flowing out of the U.S., the dollar may remain under slight downward pressure against Asian currencies.”
Kokusai’s Asia Pacific Sovereign Open fund returned 17 percent this year, beating 91 percent of its peers, according to data compiled by Bloomberg. Higuchi declined to give specific forecasts or investment strategies.