China’s recent regulatory shift to provide underlying monetary support for property developers and its struggling property sector as well as the rollback of its zero-COVID policy have resulted in one of the largest rallies in recent history for China’s property bonds and high-yield bonds market, reported WSJ.
High-yield bonds in Asia gained 18% in total returns in November, the best month for the property bond market in Asia in a decade, prompted by the recent regulations designed to support real-estate developers and the gradual rollback of China’s almost three-year-long zero-COVID policy.
Image source: WSJ
As of the end of October, a $1 billion bond that matured in January 2024 from Country Garden Holdings Ltd, a Chinese property developer based in Guangdong and one of the largest apartment sellers in China, was bidding at $0.14, in the typical default range for bonds. That same bond bid at $0.74 this month, reflecting growing investor optimism in the space.
In mid-November financial regulators in China released 16 measures aimed at providing underlying support for real estate developers and the property market for both public and private developers.
Many investors have sidestepped the Asian bond market specifically as well as emerging market bonds because of their exposure to China in the last year. For investors that started the year with high-yield bonds in Asia, those investments are still down cumulatively for the year, but the recent recovery and the recovery trajectory looking ahead could mean strong opportunity.
Image source: WSJ
“We have been pounding the table on this trade for months. Pain trade is higher as no buyers. None” tweeted Brendan Ahern, CIO of KraneShares. “China’s policy changes on COVID-19 and the property sector have sparked a big junk-debt rally.”
Investing in Asian High-Yield Bonds With KHYB
The KraneShares Asia Pacific High Yield Bond ETF (KHYB) is an actively managed fund that invests in USD-denominated high-yield debt securities from companies in Asia, excluding Japan. The fund is poised to capture the recovery and growth of the Asian bond market.
KHYB is benchmarked to the JP Morgan Asia Credit Index (JACI) Non-Investment Grade Corporate Index and invests in high yield fixed income securities, or “junk bonds,” that are rated below the four highest categories (Ba1/BB+ or lower) by at least one credit rating agency, or, if unrated, are determined by the sub-advisor to be of similar quality.
Nikko, the sub-advisor, uses top-down macro research and bottom-up credit research to create the portfolio, as well as a proprietary process that is a combination of qualitative and quantitative factors used to value an issuer’s credit profile.
By moving the credit curve up, KHYB will be more defensive against the benchmark and have shorter duration bonds than the index. When the bonds mature, Nikko can decide how and when it wants to redeploy and invest in new bonds, depending on market conditions.
KHYB carries an expense ratio of 0.68%.
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