Rising fears of a double-dip recession and the escalation of the European debt crisis have kept markets volatile, but the consensus among analysts is that bonds, in selective cases, offer good opportunities for global investors.
Asian bond markets, according to a Schroders report last week, are supported by high interest rates and global demand for safe assets. “More than half of the bond market is made up of countries which have very high GDP per capita and very high liquidity as well,” said Rajeev De Mello, head of Asian fixed income at Schroders.
Indeed, 83% of bonds within HSBC’s Asian local bond index are issued by countries that are rated at investment grade by Standard & Poor’s, according to Schroders, while Asia’s governments have stronger fiscal positions given their relatively low debt levels.
Asian local bonds have delivered better annual returns with lower risk than many other asset classes recently — with 10-year annual returns 8.1% and volatility of 6.5%, while Asian US dollar bonds have posted lower returns of 7.6% and a higher level of risk at 7.5%. Asian local bonds also have a better long-term risk/return ratio than US Treasuries.
Among Asia's bond markets, the Philippines and Indonesia have posted the highest total return of about 250%, while Hong Kong, Taiwan and South Korea have grown at a slower pace of around 25%.
The yield difference between US government bonds and Asian local bonds has also widened significantly since 2007, reaching a 10-year high this year.
Schroders added that Asian corporate bonds are particularly attractive due to the strong economic environment and low default rate. Asia ex-Japan is projected to grow by 7.2% in 2012, as opposed to 1.9% for Japan, 1.8% for the US and less than 1% for the eurozone.
Corporate bonds outside Asia are also attractive. “Corporate balance sheets are in good shape,” said Threadneedle, an international asset manager, at a web conference last week. Companies within the MSCI UK Index have been holding on to cash since the financial crisis, with a reduction in debt-to-equity ratios in the non-financial sector to around 20%, down from more than 50% in 2008. While dividend yields are a better indicator of value, Threadneedle forecasts that approximately 68% of firms within the index will raise dividends per share in 2011, up from 62% last year, and this figure will continue to increase to around 80% by 2013.
“We prefer corporate bonds over government bonds,” said Philip Jehle, Asia managing director of Lombard Odier at a media briefing last week. “Corporations actually are quite well-managed.” However, Lombard Odier noted that systemic risks are still high despite the attractive corporate spreads.