Attractive returns for Asia junk bonds

Goldman Sachs sees opportunity in such assets

NEW YORK: Goldman Sachs Asset Management sees an opportunity in Asia’s junk dollar bonds, which lag the United States despite a recent rally.

Investors are pouring money into riskier debt globally, after the US election fuelled expectations for a split government that would keep yields low longer and following progress toward a Covid-19 vaccine.

Yields on Asian speculative-grade notes dropped for seven straight days through yesterday but are only at the lowest in about a month, while those on US peers have slid to a record low.

“We continue to view the return potential in Asia high-yield, in an otherwise low-rate environment, as being attractive,” said Salman Niaz, head of Asian credit.

The firm supervised more than US$1.8 trillion of assets globally as of Sept 30.

Junk bonds globally have rallied this year after unprecedented central bank stimulus to counter the effects of the pandemic. But the gains have lagged in Asia, where monetary authorities stopped short of buying such debt as the Federal Reserve started doing earlier this year.

Investors have been more cautious on the

“We continue to view the return potential in Asia high-yield, in an otherwise low-rate environment, as being attractive.” Salman Niaz

region’s riskier issuers without such targeted support.

Jitters over large borrowers including commodities firm Vedanta Resources Ltd, property giant China Evergrande Group and Sri Lanka have also given some buyers pause.

Average yields in Asia are around 7.7%, compared with about 4.7% for US high-yield corporate bonds, according to Bloomberg Barclays indexes.

Adding to the appeal, the region’s junk bond market has less exposure to energy and Covid-19 related sectors compared with the United States, according to Niaz. Asian high-yield dollar securities are trading at levels that suggest the percentage of them that may default would be in the mid-to-high single digits, according to the asset manager. But the average default rate for the notes in past years has been only mid-1%.

“We think the market is too pessimistic about potential default probability over the next 12 months,” said Niaz, who is also an emerging-markets fixed-income portfolio manager at the fund.

The region has also handled the spread of the coronavirus better than other areas, which is a positive, he added.