Australian institutional bond investors are considering increasing their allocations to Asia Pacific, where record levels of bond issuance are broadening opportunities for diversification and relatively high returns.
AllianceBernstein director of Asia Pacific fixed income Hayden Briscoe says that there is a significant differential between the yields on offer in investment-grade Asian corporates versus global investment grade bonds.
"If we look at Asian corporate bonds, they're predominantly investment-grade markets, but they're paying over 100 basis points more in yield than global investment-grade credit."
Furthermore, he adds that institutions will need to act quickly before the most attractive investment opportunities in the region are arbitraged away.
"The Asian government bond markets, broadly speaking, consist of net creditor nations which have consistently generated current account surpluses, paying investors yields two-to-five times higher than those of developed countries," he said.
The majority of Asian countries, Briscoe adds, are experiencing higher levels of growth than developed markets, resulting in higher free cash flow for corporates. Also, the links between the private and public sectors in Asia tend to be very strong and amount to implicit sovereign support.
"As more investors become aware of these benefits and start buying Asia-Pacific bonds, that 100 basis-point spread differential will begin to compress," he said.
"We recommend that managers be given a broad and flexible approach allowing rotation across countries, sectors and currencies in the region," Briscoe continued. "And we believe very strongly in solid, on-the-ground research conducted as part of a global effort which applies both quantitative and fundamental techniques to generate local and global research insights."