SH: Asian local currency bonds provide alternative to traditional safe havens

Pieter van der Schaft, Product Specialist, Asian Fixed Income

Although Asian local currency bonds posted negative returns during May, these were much smaller than those of developed market bonds. In fact, Asian local currency bonds have various intrinsic strengths, which make them an alternative safe haven asset with low correlations to risk assets. They also offer a superior risk-return profile versus developed market bonds when currency-hedged. An added benefit is that Asian local currency bonds offer yields which remain near historically high levels relative to US Treasuries.

The benefits of diversification
Amid severe weakness in most developed government bond and emerging market (EM) local currency bond markets during May, Asian local currency bond markets showed greater resilience with a negative return of -2.60%. This compares to negative returns of -3.44% and -5.65% for the Citi WGBI and JPM GBI broad diversified indices, respectively. This resilience of Asian local currency bonds is reflective of various intrinsic strengths of the asset class. Firstly, the HSBC Asian local currency bond index offers exposure to 11 liquid bond markets, which are generally rated investment grade. It covers economies with diverse levels of per capita incomes, economic structures and currency regimes (exhibit 1).  For instance, 55% of countries in the HSBC ALBI index (by market cap) are rated AA or above, 23% of bonds in the index are denominated in currencies (CNY, CNH and HKD) which track the USD closely, while 25% of the index consists of countries (India, Indonesia, the Philippines) which are classified by the World Bank as lower middle income. This results in significant diversification benefits. Only four markets suffered significant negative returns (in excess of -1% in USD terms) in May and – with the exception of Indonesia – these were generally the region’s high grade markets (HK, Singapore), which are more sensitive to US Treasuries.

Source: BONDWorld – Schroders