Asian Dollar Bonds Could Yield Decent Return In 2017: UBS
Amidst a low-rates environment and being a more stable part of global EM, one can expect Asian dollar bonds to still offer a decent return during the current year, according to UBS. Anna Ho and team said in their January 3 research note titled “The Asia Credit Analyzer” that they anticipate that the level of construction activities and infrastructure build uplift will sustain commodity demand in China into 2017.
Ho and colleagues point out that last year, the yield and credit curves for Asian dollar bond prices steepened along with rising UST yields, with the market adjusting to the developments on a new U.S. administration front. The analysts note that Asian dollar bonds gave back about 2 percentage points of their 2016 gains since the U.S. election results were announced, returning 7.7% YTD.
Factoring in GDP growth and inflation forecasts of 2.4% and 2.6%, respectively, the UBS analysts anticipate that 10Y UST will end 2017 at 2.25%. The analysts believe the total return for Asian dollar corporate bonds will touch 4.67% this year, and they expect the volatile movement in rates to offer better trading opportunities in Asian dollar bonds.
They anticipate that IG and HY corporate returns will reach 4.88% and 5.64%, respectively.
The UBS analysts point out that though corporate perpetual bonds have been hit by recent UST moves, they now provide yield pick-up of up to 200bps for the coupon deferral risks and, in some cases, subordination risks.
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