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GARY DUGAN

BRYAN COLLINS

BEAR: GARY DUGAN
While we do have sympathy for a continued bull market case for high-yield bonds, we also remain concerned about the market when the world starts to tighten money supply, particularly in the United States.
At present, monetary conditions are exceptionally loose. Major central banks around the world are printing money. Interest rates are close to zero.
This has two important implications for investors.
The first is that there has been something of a mania in recent times for high-yield bonds, as investors hungrily sought out any yield that could beat paltry deposit rates and the rate of inflation. Bonds have been popular but perhaps too popular - the word "bubble" commonly gets used to describe this market. High-yield bond funds were the most popular fund category in Hong Kong last year.
The second important implication is that, when interest rates eventually go up, bond prices will go down. I think the turning point will come when the US Federal Reserve starts cutting back on its quantitative easing programme. When 10-year US government bond yields start to push above 2 per cent, I expect it will trigger a correction in bond prices.
The danger is that when this correction happens, investors globally may stampede out of debt and into another asset, perhaps equities. This possibility is so much on the minds of institutional investors it has acquired its own term: "the great rotation".
Bear in mind there is little evidence that this rotation is happening. Bonds remain a hugely popular investment globally. But investors at the least may want to assess whether they are overinvested in high-yield bonds, which are inherently risky.
Don't forget that the original name for high-yield bonds was junk bonds. I don't believe that all high-yielding debt will become worthless. I do worry that easy monetary conditions hide weaknesses in the companies that issue them.
Firms that issue high-yield debt often operate in sectors that have volatile economic cycles - for example, property - and such companies are in danger of quickly lurching from profit into losses. High-yielding debt is mostly issued by companies that have weak balance sheets or poor cash flow. That is why they yield more. Otherwise, investors would not subscribe to them.
I urge investors to consider whether they are overexposed to "junk" and whether they need to pull back their holdings.
Gary Dugan, chief investment officer, Asia and Middle East, Coutts
 

BULL: BRYAN COLLINS
The Asian high-yield bond market was among the best performing asset classes last year. Given the strong rally, investors are worried about a bubble.
It will be tough for Asian credit to repeat the strong returns of last year as valuations are now broadly fair, so investors should moderate their expectations. We may see some increased volatility in bond prices compared to recent months. Nevertheless, we think Asian high-yield bonds remain appealing for longer-term investors because income - the core attraction of this asset class - continues to be a significant contributor to total return.
From an economic perspective, Asian firms are healthy and US fiscal cliff and euro-zone debt concerns have eased. Inflationary pressures could re-emerge in the region in the year ahead but the direct impact on firms should be contained. Moreover, high-yield bonds generally have a lower sensitivity to rising interest rates compared to longer-dated sovereign (government) debt and investment-grade bonds.
China, which forms a dominant part of the high-yield market, retains a stable-to-positive outlook for the coming year. Over the longer term, we expect policymakers to continue to implement reforms to encourage growth, while deepening the onshore financial markets and promoting efficient capital allocation. This will benefit China's long-term growth and will be equally beneficial to the region and the rest of the world.
Over the coming months, we expect a steady supply of new Asian high-yield issuance, including some refinancing of existing bonds, as companies extend their funding options.
Some risks remain. Sovereign debt concerns and fiscal austerity in developed markets will affect global growth, market sentiment and volatility in the near term. We must also remain vigilant on corporate governance in Asia and watch out for companies that leverage up too aggressively in this climate of low interest rates.
Overall, Asian credit markets are smaller than their European and US counterparts and as such, Asian high-yield funds need to actively manage liquidity and credit risks.
But with a decent yield, less sensitivity to rising interest rates, lower underlying corporate leverage compared to other developed markets and with volatility lower than Asian equities, Asian high-yield remains attractive, given the risks for seasoned investors, or those who can withstand a higher dose of volatility.
Bryan Collins, portfolio manager - fixed income, Fidelity


Bull vs Bear: high-yield bonds

Business

Money

Markets & Investing

In Bull vs Bear, specialists argue opposing views on hot market topics. In this week's column, two investment experts face off over whether high-yield bonds are a good buy


In Bull vs Bear, specialists argue opposing views on hot market topics. In this week's column, two investment experts face off over whether high-yield bonds are a good buy.
