Fixed income looks set to have its moment in the sun

AFTER a decade of living in the shadow of equities, fixed income looks set to have its moment in the sun. With the largest rate hikes now likely over and the slowdown in growth still not fully priced in, Asian investment-grade (IG) and high-yield (HY) bonds are offering risk-adjusted value, and could well add to portfolio returns, especially in H1 2023.

The year 2022 has been tumultuous with Asia’s bond markets down 17 per cent as at end-October 2022. For the full year, Asia bond returns are likely to be worse than during the 2008 global financial crisis, when the asset class fell 9.8 per cent. It is important to note, however, that 60 per cent of the year-to-date (YTD) losses in Asian bonds is due to the sell-off in US Treasuries on account of the high inflation and Federal Reserve tightening. The rest of the losses can be attributed to the sharp sell-off in China’s property sector, fund outflows and the US dollar surge.

With spreads of Asia IG bonds at 240 basis points, or one standard deviation (sd) above the 10-year mean, and Asia HY bonds at 1,500 bps (more than 2sd above the 10-year mean), we see value – and limited downside – in both Asia IG bonds and the Asian HY USD corporates (excluding China property). We consider some of the catalysts that could support price gains in 2023.