×

Safer Bonds, Higher Yields? Buy Chinese: Analysts

Risk premiums on corporate bonds have been rising as investors spooked by Greece's debt crisis and a U.S. slowdown have demanded higher yields. But some analysts say, for investors hoping for higher yields without taking on too much risk, investment grade corporate bonds from China provide a good alternative.

bond_corporate_200.jpg

"[China's] investment grades are usually bigger companies. They tend to be mostly owned by the government and have better transparency," says Raymond Lee, portfolio manager at Kapstream, a fixed income fund based in Australia with A$4 billion asset under management.

Investment grade, dollar-denominated Chinese corporate bonds offer yields of between 4 and 8 percent, much higher than yields on U.S. corporates.

Take for example the 2019 bonds of CNOOC, China's largest producer of offshore oil and gas. The bonds, which are rated AA-, currently trade at a yield of 4.22 percent. On the other hand, a 2019 Chevron bond rated AA pays a yield of 2.9 percent.

Lee says CNOOC's bond is a safer bet because the company is 64 percent owned by the Chinese government, meaning there is little chance of a default.

Lee says his fund is considering buying Beijing Enterprises' 2021 bond which is rated A- and trades with a yield of 5.05%. The company, which is 51 percent owned by the Beijing government, engages in businesses ranging from pipeline gas operations, sewage and water treatment to even running a beer brewery.

Tim Jagger, Head of Credit Strategy, Asia Pacific at RBS is also bullish on Beijing Enterprises' bonds. He says investors will continue to buy Chinese investment grade bonds, despite recent worries about corporate governance at Chinese firms.

"Investment grade wasn't really hurt. It was the high yield space that's having trouble," Jagger told CNBC. Prices of high yield bonds have fallen around 3-5 percent in the past two to three months but prices of investment grades have stayed stable.

According to JP Morgan's Asian bond index, investment-grade bonds have risen 3.84 percent so far this year whereas high yield bonds are up 2.35 percent.

But the recent accounting scandals have made investors a lot more wary about buying into Chinese bonds, says Kapstream's Lee.

Yet default rates remain extremely low among investment grade issues in Asia. Defaults on BBB-rated bonds are between 1.5 and 2 percent over a 5-year view, according to Jagger.

Still, Jagger recommends investors go for the more defensive names in the Asian bond space.

"We are going through a massive period of risk aversion at the moment. Hence our preference to move up the capital structure within the credit world. You need to pick the right securities to outperform given the broader market environment."