Yield to Worst

Building a moat against rising rates with Asian bonds

As with any major policy change, the first US rate hike since 2016 is expected to trigger market volatility. While investors may have already considered this possibility, the difficult part remains: how to position themselves for this pivot?

Rising rates require robust risk management, as bond values ​​typically fall. For investors with greater flexibility to navigate global fixed income markets, Asian bonds offer a differentiated risk profile that we believe would make them valuable and timely holdings to insulate global portfolios from these risks.

Duration management

Overweighting short durations is one of the main strategies to mitigate the risk of changes in interest rates. The longer the duration of the bond, the more likely its value will fall as interest rates rise. Therefore, holding bonds with shorter durations helps to reduce bond price volatility in a portfolio.

Asian bonds offer the advantage of a shorter duration than their US and global counterparts, both in the Investment Grade (IG) and High Yield (HY) segments. For example, Asia IG has a duration about three years shorter than US IG, but offers additional yield. Similarly, a comparison between HY US and HY Asia highlights the shorter duration of the latter, but with a return almost doubled.

This higher yield/shorter duration profile potentially provides more leeway for spreads to tighten and help absorb rate changes. Active management of duration at the portfolio and stock level, adjusted for the direction of interest rates, should minimize the risk of bond value erosion and potentially enhance returns.

Asia’s duration is shorter than its peers with better yield

Source: Bloomberg, PineBridge Investments as of February 15, 2022. For illustrative purposes only. We do not solicit or recommend any action based on this material. Duration is a measure of the sensitivity of the bond to changes in interest rates. Yield refers to the rate of return if bonds are held to maturity. The rate of return includes coupon payments received during a bond’s term and its principal repayment at maturity.

Low correlation with US Treasuries

In the medium to long term, we expect the rate hike cycle to have a moderate impact on Asian credit. Over the past 10 years, the sensitivity of Asian investment grade bonds to interest rates is 0.5 R squared, indicating that it is moderately correlated.1 Within the Asian high yield segment, the sensitivity is negligible at 0.0003. This suggests that holding Asian bonds should be more favorable than US bonds, especially at the start of a rate hike cycle.

Historical correlations between Asian bonds and US Treasuries

Asia HY vs 5y UST – negligible correlation

Historical correlations between Asian bonds and US Treasuries

Asia IG vs % 5 Yr UST – moderate correlation

Historical correlations between Asian bonds and US Treasuries

Source: Bloomberg, PineBridge as of January 31, 2022. JACI refers to the JP Morgan Asia Credit Index. YTW stands for worst case yield, which refers to the lowest possible yield you can receive on a bond assuming the issuer does not default. For illustrative purposes only. We do not solicit or recommend any action based on this material.

Credit spreads for the high yield sector continue to trade at historically high levels due to ongoing concerns within the Chinese real estate space. But with an ultra-low correlation to US Treasuries, the wider credit spreads within the segment should provide a buffer to offset rising interest rates.

This position is funded by Pinebridge Investments


1 The higher the R-squared number, the more correlated the asset.


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