Owing to a spate of defaults and worse in the Chinese property market, Asian high yield corporate bonds may not be the asset class atop many fixed income investors’ wish lists.
However, the dark days littered with negative catalysts for Asian junk debt are mostly in the rear view mirror, indicating that opportunity could await risk-tolerant bond investors with exchange traded funds such as the KraneShares Asia Pacific High Income Bond ETF (KHYB ).
KHYB is actively managed and attempts to beat the JP Morgan Asia Credit Index (JACI) Non-Investment Grade Corporate Index, which is one of the most widely followed gauges of junk-rated debt issued by Asia-based corporations. Active management has long offered advantages in the high yield bond market, and those benefits can be amplified when extending beyond the U.S. KHYB’s benefits don’t end there.
“Asia’s bond market has witnessed steady growth over the past decade, increasing in market capitalization by over 200%.1 Following a liquidity crunch in China’s real estate development industry, high yield spreads in Asia have reached five-year highs. Currently, KHYB offers a 30-day SEC yield of 9.6% compared to 7.6% for US high yield,” according to KraneShares research.
That’s a significant yield advantage under any circumstances, but that’s magnified when considering that KHYB has a duration of just two years and its credit quality doesn’t imply significant risk of default. Those benefits are accessible at a time when China’s property market is finally showing signs of stability following turbulence over the past two years.
“However, at the end of last year China’s government made progress at reinstating developers’ borrowing capabilities after many restructurings. Furthermore, the country rescinded its zero COVID policy, increasing consumer confidence and boosting demand in the consumer and real estate sectors. And, after 16 consecutive months of price declines, home price in China stabilized in January,” added KraneShares.
Coming off decade lows in some Asian property markets, KHYB could be primed for upside this year while delivering significant income. The fact that Nikko, which has one of the most extensive track records of managing Asian bond portfolios, is KHYB’s sub-advisor further enhances the allure of the ETF.
“With higher yields compared to global bond markets and exposure to China’s reopening and high economic growth in Asia, we believe Asia’s high yield bond market presents a compelling opportunity for investors. Having only begun to rebound from 10-year lows in 2022, we believe that now could be an attractive entry point for long-term investors,” concluded KraneShares.
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