Market Insights

Chart of the Month

In this monthly series, we highlight an interesting chart in the Asian fixed income space, explain the underlying trend and share our insights on why we think it is important.

Asian credit and Asian high yield can better withstand rise in interest rates

Asian credit and Asian high yield

Source: BlackRock, 26 Feb 2021. Past performance is not a guide to future performance. Asian Credit: PM Asian Credit Index; Global Aggregate: BBG Barclay Global Agg Corporate Index; Asian High Yield: JPM Asian Credit non-IG Index; Global High Yield: ICE BAML Global HY Constrained Index (100% USD Hedged). Index performance is for illustrative purpose only. Investors cannot directly invest into an index.

Bond performance consists of price returns and interest income. Rising interest rates cause bond prices to fall, negatively impacting price returns. Yield / duration ratio measures the breakeven point at which falling bond prices will overwhelm the interest income, thereby resulting in a capital loss. All else being equal, the higher the ratio, the more your yield can withstand a rise in rates.

Interest rates, especially the 10-year treasury yield, have slowly begun to normalise from low levels. It would be prudent to invest in an asset class that is resilient to the ongoing rise in interest rates. Because of their higher yields and lower duration, Asian Credit and Asian High Yield have better yield / duration ratios than their global counterparts, allowing them to better withstand the impact of rising interest rates.


 

Asian high yield delivers higher yield at lower default rate

Asian high yield delivers higher yield

Source: Default rates from JP Morgan, 31 December 2020. Indices used for yield are ICE BAML Corporate indices, 29 January 2021. Index performance is for illustrative purpose only. Investors cannot directly invest into an index. There is no guarantee that any forecast will come to pass.

2020 saw a divergence in default rates between Asia and the US. US high yield (High Yield) default rate was double of Asian High Yield, mainly due to the impacts of the energy sector on the US High Yield market. Recoveries were also vastly different, with Asia High Yield at 40% versus US High Yield at 16%.1  

For 2021, US High Yield default rate is expected to be 4% while Asian High Yield default rate is expected to ease to around 2.4%. However, despite subdued expected default rates, Asian High Yield delivers a yield that is more than 2% higher than US High Yield.  This discrepancy highlights an opportunity in Asian High Yield as an asset class that can potentially offer high income supported by strong fundamentals.


Asian Credit to Benefit from Stronger Expected Growth in Asia in 2021

Asian Credit to Benefit from Stronger Expected Growth in Asia in 2021

Source: JP Morgan Global Outlook, September 2020. For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass.

Recent economic data has demonstrated that the Asian economic recovery has extended beyond North Asia to other parts of Asia. We believe that the efforts to contain the pandemic, coupled with an incoming vaccine, should buoy laggards in this recovery.

In India, for example, signs of recovery can be seen in economic indicators such as industrial production, purchasing managers’ indices and inflation. It should benefit greatly from the vaccine and the rebalancing of global supply chains.

This supportive macroeconomic backdrop, stable corporate fundamentals, attractive yields at a moderate duration means that Asian Credit is well-placed to attract global investor flows.