Traditionally, a rising rate environment is unfavorable to fixed income assets, as it causes bond values to fall. Fixed income investors looking for both price appreciation and a stable income stream need to navigate the market more skilfully than usual.
This could involve positioning in segments of the bond market where credit quality is more resilient and durations are shorter.
These include Asian Investment Grade (IG) bonds denominated in US dollars, which consist of the highest rated bonds in the market. These bonds remain attractive to income-seeking investors as they offer a better yield than IG bonds in the United States and the Global Aggregate Index.
The duration of Asian IG bonds also tends to be shorter, indicating that they are less sensitive to rising rates and therefore their values may fall less than their peers.
“Essentially what you get with Asia IG bonds is a higher yield and higher credit spread with less interest rate risk, which is important in a challenging market. to growth challenges and rising rates,” says Mr. Omar Slim, Managing Director, Portfolio Manager, Fixed Income at PineBridge Investments.
Continued equity market volatility also makes fixed income an asset class to explore despite rising rates. In particular, analysts expect IG Asian bonds to continue to perform well this year despite global macroeconomic headwinds as economies in the region gradually reopen.
“Generally, credit metrics in Asia, such as corporate net debt, have remained relatively low compared to the United States, Latin America and other emerging markets, while interest coverage ranked highest among these three regions. That, combined with a stable Asian investor base, should anchor credit spreads,” says Slim.
In terms of diversification, IG Asia bonds historically offer a higher Sharpe ratio than IG US credit, US inflation-linked bonds and global equities (based on five-year total returns). The higher Sharpe ratio suggests that Asia IG rewards the investor better (in terms of total return) for each unit of investment risk.
Asia IG bonds also offer exposure to China, other North Asian countries and emerging ASEAN economies which remain underrepresented in global bond indices; and as such would not be as present in the portfolios of asset managers who adopt an index approach.
Given the dispersion of returns in the Asian IG market, active investing gives portfolios the flexibility and control to select individual bonds for metrics beyond yield or market capitalization, but also for a multitude of important factors, including credit quality and environmental, social and governance factors (ESG risk).
From a technical standpoint, Slim notes that the growing money supply in Asia is chasing a relatively low volume of Asia IG bond issuance; net issuance – gross issuance minus debt maturities, redemptions and coupon payments – is expected to remain weak for some time as primary markets are in flux. This, in turn, will help mitigate market volatility. “So basically all of these factors, whether it’s fundamentals, valuation, or technicals, continue to have investors looking at this market.”
A rigorous investment approach
IG bonds represent 80% of the Asian bond market, with a diverse mix of sectors, markets and ratings.
PineBridge is capitalizing on this opportunity through its flagship PineBridge Asia Pacific Investment Grade Bond Fund, which aims to provide investors with stable returns and long-term capital growth. The fund offers investors pure Asian IG exposure, with no sub-IG obligations. The fund uses a research-based active credit selection process implemented by an award-winning fixed income team, which has a track record of zero defaults.
Although an investment in some of the highest-rated bonds in the market may be inherently exposed to a low default rate, portfolio holdings are robustly assessed for their ESG risks.
Mr. Slim says: “ESG is a key part of our investment process. We systematically analyze issuers using our internal ESG framework based on the United Nations Principles for Responsible Investment.
Volatility may continue to test investors’ patience, but a portfolio of high-quality Asian bonds can tick all the boxes for risk-conscious investors who want better returns in today’s markets.
Click on here to learn more about the PineBridge Asia Pacific Investment Grade Bond Fund.