WHERE IS THE “ALPHA” IN ASIAN CORPORATE BONDS?
*Credit Suisse Asian Bond Corporate Spread over Swap (2002-2013)
Even 5 years ago in 2007, any respectable investor other than specialised credit traders & fund managers, will not be caught putting money to work in Asian corporate bonds. It is really a niche area best left to those who need to participate in the Asian yankees or local currency papers. Fast forward to 2013, post-2008 global financial crisis onset, with Quantitative Easing (QE) and low rates for long mantra held by almost all global Central Banks including those in Asia coupled with an aversion for equities; everybody including your neighbour have piled into Asian corporate bonds.
With private banks offering nice leverage of 3 to 5 times, Asian corporate bonds offered a nice return on equity (ROE) and seems like a surewin as credit spreads tightened and interest rates fell too … gimme more of this manna !!!! You can hear the shrieks of delight from Singapore’s Marina Bay to Hong Kong’s Central district.
Without going into all the esoterics of asset swapped spreads to Z-spreads and other tales that credit salespeople in various investment banks or private banks will regale you with on why Asian credit is still worth putting your money to work. I believe a picture / chart says a thousand words. If you look at the above, the ”Old Normal” fair credit spread before 2008 global financial crisis was around 100 b.p. (-/+ 20 b.p.). I believe the ”New Normal” fair credit spread post 2008 financial crisis is around 300 b.p. (-/+ 40 b.p.), which is exactly where we are now!
Unless the rules of the odds of corporate default in mathematics and also historical experience change, and with interest rates staying low (and yield curve flat and not steepen). Then the potential returns from here is purely ”beta” now with little ”alpha” from picking some genuine credit papers.
*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.