The global bond rout is giving fixed-income investors a rare chance to lock in Asian junk bond-like payouts without the credit risk of such debt, according to KKR & Co. "We view this as an opportunity to rotate the portfolio up in quality, rather than a reason to stay on the sidelines," said Dengzhao Pan, head of Asia liquid credit at the US firm, which had $796 billion in assets under management at the end of June. "Moving up the credit curve gives investors a wider margin of safety, lower expected credit loss."
Yields on investment-grade corporate bonds, including Asian debt, are near their highest in more than two years after the Middle East conflict drove up oil prices and prompted central-bank tightening. That has pushed yields on some higher-quality debt closer to those typically associated with junk bonds. Asian investment-grade dollar bonds now yield an average 5.8%, according to data compiled by Bloomberg. Sony Life Insurance Co. last month sold a subordinated dollar bond callable in 10 years at a 7.125% yield carrying an A- rating from S&P Global Ratings. A bond sold last month by Mitsubishi UFJ Financial Group Inc. currently yields around 6%.
"Our conviction area is Japanese financials, large-cap banks, and life insurance companies in particular, where we like the 5 to 7 year part of the curve for the best balance of yield and duration risk," said Pan. He added that while he isn't expecting a recession, he is staying clear of distressed situations and prefers to own higher-quality bonds, with no near-term solution to the Middle East conflict in sight.
Asian high-grade corporate bonds have lost an average 1.4% this year, compared with a 2.5% decline for US peers. Their shorter duration, averaging about 4.6 years versus 6.4 years for US debt, has helped cushion the selloff. Spreads on Asian high-grade bonds have widened 15 basis points from a more-than-decade low in early June, though they remain two basis points tighter than at the end of 2025. "In credit, the first thing that you want to make sure of is that you don't lose money," said Pan. The crossover space of BB/BBB-rated debt is "where we think the risk reward is most favorable right now," he added.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing