Opportunities aplenty among Asian investment grade bonds

ASIAN corporate bond markets have declined year-to-date but we are upbeat about the prospects of investment grade (IG) credits. In the period from the beginning of the year till March 13, the average option adjusted spreads (OAS) on Asian high yield (HY) bonds widened by 311 basis points (bps), while the average credit spreads on Asian IG bonds only increased by 71 bps. From a total return perspective, Asian US dollar IG bonds outperformed HY and remained positive as they registered year-to-date (YTD) returns of +1.05 and -5.44 per cent, respectively.

We think falling benchmark rates are part of the reason for significantly higher credit spreads. After two emergency rate moves by the US Federal Reserve on March 3 and March 16, the target range for the federal funds rate is now 0.00-0.25 per cent. Following the March 3 announcement, the central bank will continue to purchase Treasury bills until at least the end of June, and conduct overnight repurchase agreement operations at least till end- April.

The aftermath following the unexpected rate move on March 16 was a sharp spike in the federal funds April futures contracts. The sudden rate cuts were likely in response to weak financial conditions that deteriorated to the worst level since 2009. Bid-ask spreads on 30-year US government bonds, for example, had widened, and market concerns over trading conditions in Treasuries were rising, which could have led to systemic concerns in credit markets.