Asset owners position for bond market risks

Investors at a roundtable hosted by AsianInvestor discussed how they are positioning for potential bond market risks in the face of uncertainty around when and how fast interest rates are likely to rise.

The key issues facing bond investors are that government bond yields and credit spreads are at historic lows, and are expected to rise as unorthodox monetary policy in the US starts to be withdrawn, said Stephen Thariyan, global head of credit at Henderson Global Investors, which co-hosted the discussion.

In Asia, he added, there isn’t a consensus on the bond market outlook and how to position for it, hence the importance of flexibility around investment guidelines.

“Credit markets offer around 2% to 6% returns depending on the asset,” said Thariyan, “and I would be interested to see where else you could get that type of return [currently].”

Asked his view on likely moves in interest rates and credit spreads, Adrian Teng, group head of treasury at Hong Kong-based conglomerate Jardine Matheson, said: “There’s no market consensus regarding developed versus emerging markets. I don’t think there’s a consensus among central bank governors either.”

With regard to developed markets, Teng favours Europe over the US, because of the approach taken by European Central Bank president Mario Draghi.

“The economic environment in the US is very strong, but in terms of interest rates rising, I’m probably less aggressive in my forecast than the market about what [US Federal Reserve chair Janet] Yellen will do. So there is still good money to be made in the US, and most likely in the high-yield space,” noted Teng, who oversees treasury, insurance and pension assets for the group.

Turning to emerging markets, he said he preferred hard currency over local-currency debt.

“I am bullish on the dollar. I think EM currencies will remain challenged, not just because of economic issues but also due to political overhang in a number of countries and current account challenges. So why fight the wave?”

Teng pointed to “pockets of high yield in emerging markets from Middle East and Asian issuers that offer good yield pick-up and potentially also a hedge against duration risk”.

Meanwhile, Heman Wong, executive director of Hong Kong's Hospital Authority Provident Fund Scheme, said the key question on interest rates is how far and how fast they rise.

“We need to know how we’re going to manage such risk. The question of how far and how fast [rates will rise] translates into trading the portfolio against the implied forward curve,” said Wong, who oversees $6.5 billion in assets, about half of which is in fixed income.

In the current market, he said he is targeting high single-digit returns and he has made some portfolio changes. For example, Wong shifted some bond exposure into a fund of hedge funds, to reduce the risk on the duration side and enhance return as well as hedging.

The fund also moved some of the bond allocation into global real estate investment trusts 12 months ago. “That helped to bring our bond portfolio return up nicely against the benchmark,” said Wong.

Teng, meanwhile, has looked at such as increasing his portfolio's emerging-market debt exposure and lengthening duration a little.

“I think I was too cautious in the middle of last year and tried to rein [my external fund managers] in on duration,” he noted. “But obviously that was not the right call, and since then I’ve asked them to push it out a bit.

Moreover, Teng is looking at adding some exposure to certain European developed-market sovereigns “at the edges”, and also to US high-yield.

“Fundamentally the global economy is moving in the right direction, and we’re not going to get sudden and massive spikes in interest rates,” he said. “It will be gradual, so I don’t think we need to have knee-jerk reactions.”

To read more on the roundtable, see the current issue of AsianInvestor.