High yield or junk bonds carry added risk. Hence the higher yields. In some cases, the elevated risk profiles of junk-rated debt can keep investors at bay, particularly when it comes to ex-U.S. fare. That reluctance can lead to missed opportunity. Consider the case of the KraneShares Asia-Pacific High-Income Bond ETF (KHYB ).
The fund is up an admirable 3.13% YTD, while the largest domestic junk bond is slightly lower.
Obviously, five months and change isn’t enough to adequately measure performance when it comes to bonds,. But it’s not a stretch to argue that KHYB deserves more acclaim. That claim is supported by the fact that there are signs of life emerging in Asia’s junk bond markets. Those markets were previously hampered by weakness caused by China’s real estate debt.
Favorable Fundamentals Emerge for KHYB
The aforementioned headwinds created by a spate of real estate defaults in China are hard to overlook. The good news is that KHYB isn’t a dedicated China ETF. Market participants are awakening to the fact that there are some solid ideas in Asia’s junk bond market that don’t involve China real estate bonds.
And recent data indicates increased sales of junk bonds across various Asia markets. The appetite for that debt has been steady.
“Regional sales of such corporate notes, outside of Japan, touched US$5.9 billion so far this year, already surpassing US$4.4 billion in all of 2023, according to Bloomberg-compiled data. Indian borrowers have topped the share of sales so far this year, with nearly 44 per cent share,” reported Bloomberg.
The $5.9 billion figure mentioned above is a month old. With more than six months remaining in 2024, this year’s high yield debt sales across Asia ex-Japan could easily be one of the best totals in years.
Further supporting the case for KHYB is its credit quality. Yes, this is a junk bond ETF, but it’s not heavily allocated to highly speculative debt rated CCC or lower. About 82% of KHYB’s holdings are rated BB and B. Plus, most central banks in Asia are unlikely to raise interest rates over the near term. In fact, most are done with their recent tightening cycles.
Examining economic factors that are supportive of Asia junk debt, market observers are forecasting regional GDP growth this year of more than 4% amid a mostly subdued inflationary climate.
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