Traditionally, a rising rate environment is unfavourable for fixed income assets, as it results in falling bond values. Fixed income investors seeking both price appreciation and a stable stream of income have to navigate the market more skillfully than usual.
That could involve positioning in segments of the bond market where credit quality is more resilient and durations are shorter.
These include US dollar-denominated Asian investment grade (IG) bonds, which consist of the highest rated bonds in the market. Such bonds remain attractive for income-seeking investors as they offer better yield than IG bonds in the US and the Global Aggregate Index.
The duration of Asian IG bonds also tends to be shorter, which indicates that they have lower sensitivity to rising rates and thus, their values may fall less than peers.
“Essentially, what one is getting with Asia IG bonds is higher yield and higher credit spread differential with less interest rate risk, which is important in a market with growth challenges and rising rates,” says Mr Omar Slim, managing director, portfolio manager, fixed income at PineBridge Investments.
The persistent volatility in equity markets also makes fixed income an asset class worth exploring despite rising rates. In particular, analysts expect Asia IG bonds to continue to perform strongly this year despite global macro headwinds as the region’s economies progressively reopen.
“Broadly speaking, credit metrics in Asia, such as corporate net leverage, have remained relatively low compared to US, Latin America, and other emerging markets, while interest coverage ranked highest relative to these three regions. That, along with a stable Asian investor base, should anchor credit spreads,” says Mr Slim.
In terms of diversification, Asia IG bonds offer historically a higher Sharpe ratio than US IG credit, US inflation-linked, and global equities (based on five-year total returns). The higher Sharpe ratio suggests that Asia IG compensates the investor better (in terms of total returns) for each risk unit of the investment.