Playing the long game

04 February 2014   Category: News, Asia, Global, USA   By Hui Ching-hoo

The global bond market has entered a phase of rationalisation and normalisation now that the effect of the long-anticipated quantitative easing (QE) tapering has kicked in. Some long-dated bonds and Asian credits with low sensitivity to US Treasuries are prominent on bond investors’ radar for 2014, says HSBC Global Asset Management.

According to Cecilia Chan, CIO of fixed income, Asia Pacific at HSBC Global Asset Management, last year was an adjustment period that lowered investors’ return expectations on bonds: “The market sell-off intensified between May and July on the back of the increasing market expectation of QE tapering. That diverted some fixed-income assets into developed market equities.”

Ms. Chan, however, plays down this slump in capital outflow: “The shift was a cyclical and expected normalisation. Despite an adjustment process that will persist for a while as a result of the US Fed initiating a reduction in its monthly bond purchases by US$10 billion starting January 2014, the bond market has nevertheless displayed signs of improvement to the extent that the real yield of ten-year US Treasuries has returned to a positive level. So US Treasuries will be more fairly priced when the yield climbs back to a level of about 3.5%. This normalisation process is expected to be completed by the end of this year.

“Subsequent to further market correction, we shall look to overweight in some long-dated bonds while maintaining an underweight position to short-maturity bonds due to expectation of flattening of US Treasury yield curve.”

Pointing to Asian fixed-income performance, Ms. Chan confides that those credits with a low correlation to US Treasuries, including Asian non-investment grade (high-yield) corporate and offshore CNH bonds, outperformed US Treasuries-sensitive local bonds, such as Asian sovereign bonds, in 2013. The strengthening US dollar also came into play and undermined the return of Asian currencies-denominated credits last year. 

Looking forward, Ms. Chan anticipates that credit bonds will outperform sovereign bonds and prefers high-yield to investment grade credits. She expects the yield carry from investment grade bonds will compensate for any capital price loss, resulting in a total return of 1% to 2%. The total return for high-yield bonds will range somewhere between 4% and 5% and feature better yield carry.

Sectorally, Ms. Chan states that her company favours Mainland properties and industrials in high-yield, as well as Hong Kong properties and Indonesian sovereign in investment grade, on the basis of good relative valuation.

As for the dim sum bond market, Ms. Chan points out that the dim sum bond market is growing very rapidly and has developed into an interesting niche credit market with a good range of issuers and yields. She expects the market to continue to expand with participations of more new issuers comprising global and Chinese names.