Bond funds across emerging markets have had a tough year of punishing outflows, but the tide out of Asian bonds may be slowing, Cecilia Chan, HSBC's chief investment officer for fixed income in Asia, told CNBC.
Since the U.S. Federal Reserve indicated in May that it was considering tapering its asset purchase program, funds have flowed out of emerging markets, with expectations of rising interest rates adding an extra sting for bonds.
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Flows out of emerging Asia bonds peaked in July and have since eased somewhat, although $319 million exited in the week ending November 27, up from a $263 million outflow in the previous week, according to data from ANZ.
"In recent months, the outflow has been slowing down," Chan said, noting HSBC has around $50 billion worth of bonds under management. "The yield has gone up. So now the yield spread is providing a cushion for the rise in U.S. Treasury yields."
While many analysts are expecting the "Great Rotation" out of bonds and into equities to continue, Chan doesn't see further switching as a major issue ahead.
"Active money has switched out already," she said. "The investor who is still staying with fixed income is more a long-term type of investor, rather than active money," she added.
"Low interest rates will be sustained for the foreseeable future. So bonds still have value,"she said.
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To be sure, while she expects total return from Asian bonds to improve slightly in 2014 on the higher yields, she is cautious on the actual level of anticipated returns as many of the issues, such as tapering, which have dogged the segment this year will persist next year.
"We haven't really started tapering yet; we haven't started tightening yet. The macro story is still in place," Chan said.
Chan expects Asian bonds will outperform cash, with some volatility.
"We don't expect capital appreciation. We are expecting some capital loss, but compensated by higher yield carry. So the total return remains positive," she said. So far in 2013, HSBC's Asian dollar bond index has fallen 2.2 percent and its Asian local bond index has lost 4.6 percent.
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She advises seeking segments that have less correlation with U.S. Treasurys, which are expected to see rising yields as the Fed tapers its asset purchase program. She likes the Asian high-yield bond segment and prefers credit bonds to outperform sovereigns, which are more correlated to Treasurys.
Among local currency bonds, she likes renmibi bonds. In addition to having a low correlation with U.S. Treasurys, "the structural currency appreciation story is still in place," she said. Many analysts expect the Chinese currency to continue to appreciate as the country pushes through reforms of the capital account and financial sector.
HSBC views the "Dim Sum" bond market, or offshore yuan-denominated bonds, as fairly well developed, with a good range of issuers. China's onshore bond market, the world's fourth largest bond market, tends to offer higher yields, but foreign investor access can be restricted, HSBC said in a note.
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She likes selective China and Hong Kong property bonds, and advises sticking with stronger names.
She is underweight on the South Korean, Malaysian, Singapore and Hong Kong bond markets as they are more sensitive to Treasurys.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1