Are Asian high-yield bonds a safe hiding place?
Asia's high-yield corporate bond offerings may be less risky than conventional wisdom would suggest.
While fixed income markets globally have convulsed recently amid expectations that interest rates would rise if the Federal Reserve begins to taper its asset purchases, Asia's high-yield bonds have a "very, very low" correlation with that story, Tim Jagger, portfolio manager at Aviva Investors, told CNBC.
"Generally speaking, Asian corporate high-yield issuers use shorter-dated bonds, so if you're going to buy one of those bonds, there's less of a correlation with the Treasury yield," he said, noting the segment's index has an average duration of about four years.
(Read more: Taper Tantrum to ruffle Asia bond markets, warns ADB)
Shorter-duration bonds tend to be less volatile than their longer-dated peers as they are perceived as more likely to be repaid. Shorter durations also tend to feel the positive effects of rising rates more quickly, as the principal at maturity can be reinvested in new higher rates.
"It's a good place to hide in a fixed income universe," Jagger said, noting the Asian high-yield corporate index yields just under 8 percent.
How safe are Asian high-yield corporate bonds? In a September 12 report, Moody's said it doesn't expect the segment's defaults to be significant, cutting its default rate forecast for Asia-Pacific ex-Japan high-yield non-financial corporates to 1.6 percent from the 2 percent forecast it issued in February – translating into one or two potential defaults for all of 2013. It said the trailing 12-month default rate as of the end of August was zero.
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By way of comparison, Moody's expects a 2.9 percent default rate for U.S. speculative-grade bonds and a 3.6 percent rate for those in Europe for 2013.
But don't expect the lack of correlation with Treasurys to be a huge draw. It's just a function of economic growth, noted Will Oswald, global head of FICC research at Standard Chartered. As economic growth rises, the default risk of Asian bonds declines, as do their yields, while Treasury yields will rise as investors seek out riskier securities, he noted.
Oswald added, though, that the segment tends to be much less liquid, leading to larger price moves during market turbulence. "They were hit just as hard, at times harder," during the recent market convulsions, he noted.
Among sectors, Jagger likes are some of China's property offerings.
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"It's been around 10 years or so and we haven't seen a single default out of that sector," he said.
But he believes Southeast Asian offerings look vulnerable if the taper debate heats up again, although he sees some opportunities to selectively pick up Indonesian paper.
"Some of the more defensive businesses, some of the dollar earners and some of the better-rated coal names look ok here (as well as) some of the media and telco names," Jagger said. But he added, "we wouldn't be reaching down the credit curve" for lower-rated bonds.