Asia and emerging markets offer attractive fixed income yields, Fidelity manager says

Hunting for yield in EM bonds

With yields on fixed income globally set to remain low, Asia and emerging market bonds and credit offer attractive returns, a portfolio manager at Fidelity International told CNBC.

"One of the key attributes when we think about investing here in Asia -- be it Australian government bonds, Korean government bonds, Asian U.S. dollar-denominated corporate and sovereign bonds and even thinking about -denominated government bonds -- is that you're getting yield," Bryan Collins, a fixed income portfolio manager at Fidelity, told CNBC's "Squawk Box."

"You're getting a relatively attractive risk adjusted return when you compare it to other markets around the world," he said.

It's no small difference. The benchmark 10-year Japan government bond was yielding around a negative 0.271 percent on Tuesday, while the was at negative 0.1609 and the U.S. 10-year Treasury yield hovered around 1.45 percent. That compared with 10-year Indian and Indonesian local currency government bonds yielding upward of 7 percent.

Fidelity International, which had $272 billion in assets under management, has seen strong demand for investments in Asian and emerging market sovereign and corporate credit fixed income, said Collins, who manages Fidelity's Asian HIgh Yield Fund and China Renminbi Bond Fund. U.S.-based Fidelity Investments had $2.036 trillion in total managed assets at the end of last year, with $1.738 trillion of that in its own mutual funds.

According to data from JPMorgan, around $3.3 billion flowed into emerging market bonds in the week ended July 7, totting up around $12.1 billion in inflows year-to-date, compared with outflows of more than $14 billion last year.

The U.S.-based Fidelity New Markets Income Fund, an emerging market bond mutual fund, had net assets of around $4.53 billion as of the end of June; it's returned 13.33 percent year-to-date. Its one-year return as of the end of June was at 9.77 percent, compared with the JPMorgan Emerging Market Bond Index Global rising 10.32 percent over the same period, according to Fidelity's website.

The relatively stronger fixed income returns in Asia and other emerging markets appeared set to continue, Collins said, citing expectations that the U.S. Federal Reserve wouldn't be hiking interest rates anytime soon.

Typically when the U.S. tightens its monetary policy, funds would flow into the greenback, which would weaken emerging market currencies and spur concerns about whether those countries will be able to service their dollar-denominated debt.

"As the Fed hike prospects get pushed out further -- and there's really no rate hike priced in this year at this stage -- it does provide corporates right around Asia and other emerging markets with a lot of comfort and stability that any kind of currency mismatch or strong dollar environment is really going to be a relatively benign one," Collins said.

Within Asia, concerns about how foreign-exchange movements can affect the ability to service dollar-denominate debt has remained rife at least since the late 1990s, when an overload of dollar-denominated debt combined with currency depreciations helped to spur the Asian Financial Crisis.

But concerns that a Fed hike might cause a spike in have been fading.

The Fed had been dialing back rate hike expectations this year, even as job creation numbers had been trending solidly and inflation had picked up. From initially signaling four rate hikes in 2016, the Fed in March indicated just two were likely on the cards. After the Fed indicated that concerns about the U.K. referendum on whether to leave European Union (EU) stayed its hand in June, markets began marking down expectations for whether there would be any hikes this year.

Even a surprisingly strong nonfarm payrolls figure for June - showing 287,000 jobs created, compared with 175,000 forecast - didn't change analysts' expectations that the Fed wasn't likely to move soon.

The yield advantage in emerging markets may not evaporate any time soon.

Collins noted that yields in emerging market bonds may fall as well. Bond prices move inversely to yields.

"Around the world, central banks are still very accommodative. You've still got a dovish tone and you've still got very accommodative monetary policy and we're not talking about any kind of aggressive inflation spikes coming through," he said. "That certainly keeps duration, income and some of these higher quality bonds very much in favor for investors."

He estimated that spreads on some types of Asian credits, such as Chinese quasi-sovereign and state-owned enterprises or Indian quasi-sovereigns, can be as much as 200 basis points, if not more, over the sovereign bonds.

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This report has been updated to reflect that Bryan Collins is a portfolio manager for Fidelity International, which has $272 billion in assets under management.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter