JPMorgan Sees Opportunity in Asia Junk Bonds as Outflows Ebb

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(Bloomberg) -- Asia’s high yield bond market needs a sustained sign that the flood of money exiting the asset class has subsided before investor confidence can fully return, though yields have risen to attractive levels, according to JPMorgan Asset Management.

“That could be a turning point for investors buying credits that have been repriced,” Shaw Yann Ho, the company’s head of Asia fixed income who oversees $9.5 billion, said in an interview. Signs of a stabilization in flows have been seen, but not fully, she added.

Investors returned to high-yield bond funds earlier this month, for the first time since early January, according to data from EPFR Global. The funds saw $2.3 billion of inflows, the largest in over a year, in the week ending April 19, said Bank of America Merrill Lynch in a note to clients. JPMorgan’s flows have matched the global trend, Ho said.

Asia’s riskier corporate bonds have slumped this year amid a deluge of new supply just as a surge in U.S. Treasury yields undermined investor appetite for notes from junk-rated borrowers. Investors have switched to government bonds and emerging market equities, according to flow data. An attempted rally in the sector reversed this month as the U.S. 10-year yield broke through 3 percent.

Still, the yields in Asian junk bonds are rising to attractive levels, according to Ho. The yield on the ICE BofAML Asian Dollar High Yield Corporate Index reached 6.9 percent Wednesday, close to the highest in almost two years, according to data from Bank of America Merrill Lynch.

“We’re only about 50 to 100 basis points from the tighter levels of the third quarter of 2017, so we think this presents a good buying opportunity for names in which we have conviction,” she said.

The following are excerpts from a Q&A with Ho:

China investment grade stands out with attractive spreads

We’re interested in shorter duration bonds with higher spreads in the high yield sector. High yield looks more attractive to us than investment grade, with more choices in short maturities. However, we also see opportunities in Chinese investment grade bonds with 3-5 year maturities that offer spreads of 150 to 200 basis points. There are no other countries in the region offering those attractive spreads.

Bank paper looks interesting from a sector perspective

Aside from real estate where one has plenty of choices, there are also interesting opportunities in the banking sector, including subordinated bank paper that has repriced. Presuming the dollar risk free rate will continue to rise, banks are beneficiaries on a net interest margin basis. That is a positive fundamental story for the banks.

Supply-demand mismatch more acute for weaker names

Certainly there is a mismatch between supply and demand, to say the least. However, stronger issuers have funding avenues beyond the U.S. dollar bond market. The mismatch is more severe in weaker names lacking a track record.

One-year paper an option but case by case

There are potential picks on a name by name basis. We look at these notes as they are no different to other non-rated bonds, as long as we know the company story and believe in their management with a high conviction.

More positive on yuan bonds and dim sum

We like yuan-denominated bonds more than we did a year ago, because of the supportive policies in China suggesting yuan currency stability will continue. Previously we were underweight dim sum bonds but now we are closer to neutral, as we have been adding since last year through the dim sum primary market.

©2018 Bloomberg L.P.

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