ASIAN high-yield bonds experienced a sharp rebound in 2024. Using the iShares USD Asia High Yield Bond Exchange-Traded Fund as a proxy, this category delivered an impressive 15 per cent return after several years of lacklustre performance. The strong performance significantly outpaced their European and American counterparts.
Despite the strong rebound, flows into Asian high-yield bond funds remain sluggish. Inflows into this category peaked in 2021, attracting US$11 billion. However, flows sharply reversed in 2022, resulting in net outflows of US$3.4 billion, and the trend has remained weak ever since.
In a nutshell, this can be attributed partly to the lingering impact of severe drawdowns between 2021 and 2023, when the market faced elevated credit defaults, macroeconomic headwinds and heightened volatility.
Additionally, investors have shown a preference for the better risk/reward profile offered by global bond funds, given the elevated US Treasury yields in recent years.
Idiosyncratic turnarounds
In 2024, the overall favourable environment for risk assets served as a key tailwind for the Asian high-yield market. Furthermore, supportive policy measures in China, such as interest rate cuts and increased fiscal spending, drove Chinese corporate bond prices higher, including that of those in the property sector.
The performance during the year was further bolstered by idiosyncratic turnaround stories among index heavyweights in the JPMorgan ACI Non-Investment Grade Index, namely Sri Lanka and Pakistan sovereign bonds (each with a roughly 4 per cent weighting at the start of 2024) and Indian commodity giant Vedanta Resources (about 2 per cent).
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Sri Lanka – which defaulted on its sovereign dollar bonds in May 2022 – saw bond prices surge in 2024, after making significant progress on debt restructuring with bondholders. This process was successfully completed in December 2024.
Pakistan’s sovereign dollar bonds also rallied following the country’s successful negotiation of a US$7 billion loan from the International Monetary Fund in July 2024, which helped to address its funding needs and boosted investor confidence.
Vedanta Resources began 2024 on uncertain footing, with concerns over its ability to meet upcoming bond payments. However, the company implemented several measures – including asset sales, increased dividends from subsidiaries and bond refinancing – that restored investor confidence and led to credit rating upgrades.
Cautious approach in 2025
Asia’s high-yield market has evolved, with India and Macau gaining prominence, while China’s share has declined. China’s property sector accounted for 38 per cent of the index in 2020, but its share fell to under 10 per cent by end-2024.
Meanwhile, spreads narrowed to historically tight levels at the start of 2025, though they remain wider than those of US or European high-yield bonds. While fundamentals remain strong, tight spreads pose downside risks if economic conditions weaken.
After the strong rebound in the Asian high-yield market, managers are taking a more measured approach for 2025, given relatively tight credit spreads in Asia.
Investors should also note that much of 2024’s outsized returns were driven by one-off idiosyncratic events, which are unlikely to provide the same boost this year. Therefore, it would be prudent to temper return expectations for this asset class.
Nonetheless, the segment’s shorter maturity profile offers some protection against interest rate movements, and much of Asia’s macro fundamentals remain strong, presenting a reasonable investment proposition.
When it comes to picking an Asian high-yield fund, the ability of a manager to capitalise on idiosyncratic opportunities while managing the market’s relatively higher credit risk is a key success factor. As a result, credit selection remains a crucial driver of performance, and the strength of the credit research process is vital.
Finally, in selecting funds, investors should favour managers who have experienced and capable teams, and follow repeatable investment processes with robust risk management practices.
The writer is senior analyst, Morningstar Research