The second half (H2) of 2019 presents good buy-and-hold opportunities for short-duration corporate bonds, particularly Asian and US credit, because of improving valuations.
“With US Treasury yields being well anchored by the dovish guidance of the Federal Reserve and Asian central banks shifting towards a more accommodative policy stance, the investment environment for Asian high-yield bonds has turned more favourable given their attractive carry and improving credit fundamentals,” says Willem Sels, managing director and global chief market strategist of HSBC Private Banking.
Because of market uncertainties and economic fundamentals, HSBC has gradually taken some profits in US high-yield bonds since November 2018 to account for the valuation as well as to de-risk their portfolio.
In terms of risk-adjusted returns, US high-yield bonds posted 5.0% for 3-year maturity and 2.4% for five-year-maturity with a volatility of 4.8% and 5.2% respectively as of December 31, 2018. Asian hard currency and local currency bonds posted 2.3% for three-year maturity and 4.5% for five-year maturity with a volatility of 3.6% and 5.0% respectively during the same period, according to data from ICE BAML.
In terms of investment strategy, HSBC has taken a buy-and-hold approach with a focus on short-duration corporate bonds, positioning itself in the “lower for longer environment” principally as a function of valuations.
“Our investing in short duration maturities is not because of a cyclical trend but because of a spread call. We actually think the treasury yield can still go down. But if you think spreads are going to widen obviously you don’t want too long a duration and a buy-and-hold approach, you’re never going to buy and hold really a 10-year bond. It’s not very realistic,” Sels says.
Also, for buy-and-hold investors, identifying bonds which may default is more challenging for longer-term bonds than short duration bonds.
“If you buy and hold then you want to select the bonds that are not going to default. Again, it’s not really possible to have a strong view on whether a bond is going to default 10 years from now. You can do that for a two-year bond or a three-year bond but that’s the maximum maturity. That’s what we do in credit. If you have that buy-and-hold approach, it’s a relatively low-risk strategy,” Sels says.
Technically, Asian corporate bonds are expected to see increased inflows from yield-seeking investors around the world who look to reallocate from emerging market Europe and Latin America, where growth is not as promising as Asia. Chinese, Indonesian and South Korean bonds are considered to have the most attractive investment appeal.