- Reduced supply gives support as dollar bond offerings drop 18%
- ‘Very limited impact on Asian bonds’ from Brexit: JPMorgan
The relative stability of Asian dollar bonds after Britain’s vote to leave the European Union shows how rising local demand is shielding the region’s debt from global market volatility, Pacific Investment Management Co. and JPMorgan Chase & Co. say.
“I see very limited impact on Asian bonds from Brexit,” said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong. “Asian bonds continue to be underpinned by strong technical and local bids, and flight to quality.”
The investor base of Asian bonds has become localized, protecting the notes from global shocks as regional investors tend to favor familiar securities during market turmoil. In 2015, wealth held by high net-worth individuals in the Asia-Pacific region surged 10 percent to $17.4 trillion, surpassing North America, according to Capgemini SA. Equity fund managers are also betting Asian shares will rebound because local investors dominate and the turmoil may delay an increase in U.S. Federal Reserve interest rates.
“It’s mostly Asians that are buying Asian credit,” said Desmond Soon, the head of investment management in Asia outside of Japan at Western Asset Management Co. in Singapore. “It tends to be a bit more stable because there is a natural home bias, a feeling that they know the company and they know the country.”
The fallout from Friday’s surprise referendum result was less dramatic than previous shocks. The yield spread for investment-grade notes issued by Asian companies over Treasuries widened 12 basis points Friday, the biggest jump in four months, to 238, according to JPMorgan indexes. That’s still down from this year’s high of 259 on Feb. 11, when investors were worried over China’s yuan.
While 10-day volatility on the spread spiked to 30 percent on Friday, it is well below the 89 percent seen in 2013’s rout triggered by Fed tightening signals. The 100-day volatility for the same index fallen to 15.9 percent from 48.5 percent in during the ‘taper tantrum.’
The Markit iTraxx Asia Index of credit-default swaps insuring corporate and sovereign bonds from nonpayment rose 14 basis points Friday, the most in three months. Even so, that was less than the 18 basis point jump in Europe that was the biggest increase since 2008. Yields on Asian high-yield corporate bonds climbed just one basis point on average on Friday, according to JPMorgan’s indexes.
“In the very short term, we expect to see Asian spreads trade wider with global credit markets, albeit with a lower beta,” or lower volatility than the broader market, said Luke Spajic, Pimco’s head of portfolio management for emerging Asia in Singapore. “From a fundamental perspective, the drivers of value, both default probability and recovery value, are generally unmoved by Brexit in Asia.”
Reduced supply this year will also support bond performance in Asia, Spajic said. Issuance of debentures denominated in dollars, euro and yen dropped 18 percent this year to $90.6 billion, according to Bloomberg-compiled data.
Franklin Templeton’s fund manager Michael Hasenstab said in an e-mail Monday that the selloff in emerging markets “are more temporary effects” and Brexit doesn’t materially change his investment outlook for emerging markets such as Indonesia.
Stratton Street Capital expects Asia’s high-grade bonds to be a major beneficiary as investors seeks to reduce risk.
“Many investors will be looking for safe credits as an alternative and Asia is home to many of the world’s safest credits,” said Andy Seaman, the manager of Stratton Street Capital’s Renminbi Bond Fund. His fund returned 8.6 percent on average over the past five years, beating 95 percent of his peers.