04/03/2012 | 12:15am
By Natasha Brereton-Fukui
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Offshore yuan bonds are still attractive since the Chinese currency is likely to be relatively stable in the near term and to appreciate in the longer run, a senior fund manager at HSBC Global Asset Management said.
Cecilia Chan, chief investment officer of fixed income for Asia-Pacific, tipped other Asian currencies to weaken in the short term on the back of dollar strength, though she said they had good appreciation potential further ahead.
Chan–who is lead fund manager for HSBC’s Asian Bond Fund and co-manages the Asian High Yield Bond Fund–also told Dow Jones Newswires the asset management firm tends to take related currency exposure when investing in Asian local bonds, and that it is “comfortably unhedged” on the Chinese yuan, also known as the renminbi.
“We still like the renminbi, because over the long term we expect appreciation, and in the short term we also expect lower volatility compared to other currencies,” Chan said in an interview.
“So in terms of local-currency bonds, the ones that stand out would still be offshore yuan bonds.”
While HSBC had been underweight on Indonesian and overweight on Philippine sovereign bonds in its Asian local-bond portfolio, it recently took profits and is now more neutral, she added.
Issuance of so-called dim sum bonds picked up in March, after slowing over recent months as investors trimmed their expectations for gains in the Chinese currency.
Offshore yuan bonds worth US$1.655 billion were sold in March, up from US$960 million in February, US$811 million in January and only US$407 million in December, according to Dealogic.
Looking at bonds denominated in the major currencies, Chan said perpetuals or subordinated debt from investment-grade names could make interesting investments, given the opportunity to earn a higher yield from a quality issuer.
In high-yield, Chan tipped Indonesian coal and energy players.
“We think that sector will comfortably get overweight,” she said.
Chinese property and industrials offer some attractive yields, but it is very important to be selective when investing in those sectors, she added.
Chan said that positive sentiment toward Asian high-yield bonds that returned at the start of the year looked sustainable, and tipped spreads to tighten across the Asian credit spectrum as U.S. Treasury yields gradually rise–possibly to around 2.5%-2.8% on the benchmark 10-year Treasury.
While Asian investment-grade bond yields are likely to move sideways, junk-grade yields could come down, given excess demand for that type of product, Chan said.
She forecast there could be another 50-basis-points tightening in the spread on the JACI investment-grade corporate index to around 210 basis points, and the non-investment grade corporate index could tighten by around 100 basis points to about 540 basis points.
-By Natasha Brereton-Fukui, Dow Jones Newswires; +65-6415-4044; natasha.brereton-fukui@dowjones.com
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