Certain investors are rushing to Asian fixed income assets; attracted by the outlook of excellent returns even as huge quantities of the international bond market are witnessing yields entering the negative territory.
Income-seeking bond investors have not had good returns in the last few years. A record crash in developed market bond yields, which progress in the reverse direction to prices, has caught various sections of the market by surprise.
In Japan, the bonds maturing in 40 years yield less than 0.10 percent, while investors have no choice but to pay for the privilege of lending money to Spain and Italy in the short-term (nations where fiscal recklessness has resulted in a crisis a few years back).
After the Brexit vote disorder, the total bonds with negative yields has increased to $11.7 trillion (an increase of 12.5% since May 2016).
The percentage of the bond market in the negative-yielding area would most probably only deepen, especially in Europe & Japan, and that is expected to drive funds into the bond markets in Asia.
According to Stephen Chang, head of Asia fixed income at JPMorgan Asset Management, “The quantitative easing coming out of Japan and coming out of Europe continues to drive flows into other high-yielding assets.”
Experts are looking at emerging market nations and Asian nations for their yield. Investors are projected to move towards this destination to secure excellent yield.
Though the market is not against the dollar-denominated bonds by borrowers in Asia, it preferred local-currency issues in Asia. Certain central banks in Asia still had the capability to reduce rates and currencies seemed to be inexpensive after the dollar rallied in 2015. That indicated the local-currency bonds would increase.
Some market experts are calling Asian fixed income as the only bright spot in the markets. The local currency bonds issued by Indonesia and China were starting to display the value.
The positive outlook towards the fixed income in Asia was in contrast to Credit Suisse advising clients to adopt a low-risk strategy toward equities and asking them to move towards cash.
The reason for such a rally in the bonds in Asia is due to a negative yielding scenario. The demand for the Asian bonds has increased amid the Central Bank’s plan to purchase nearly 21 billion euros of corporate bonds each month.
It would be prudent for investors to seek investment-grade dollar-denominated Asian bonds to ensure the safety of the cash and junk-rated issuers must be avoided.