Asian high-yield bonds staged a remarkable comeback in 2024, delivering an impressive 15% return after several years of subdued performance. This surge significantly outpaced the returns of their European and US counterparts. The strong performance was fueled by spread-tightening across key sectors such as real estate, metals, and mining, as well as idiosyncratic recoveries in sovereign and corporate bonds. Notably, Sri Lanka and Pakistan’s sovereign bonds saw substantial rebounds, while Indian corporate Vedanta Resources also contributed to the rally.
Fund Exposure to Top-Performing Securities
Analysis using Morningstar’s security ownership tool revealed that funds such as UBS Asian High Yield and Pimco Asian High Yield had among the highest allocations to these top-performing securities, helping them achieve category-leading results in 2024.
Source: Morningstar Direct; Data as of Dec. 31, 2024. *Fund Exposure data is calculated as the average holding in the fund for the first nine months of 2024.
Despite the strong rebound in 2024, flows into Asian high-yield bond funds remained sluggish, partly due to the lingering impact of severe drawdowns between 2021 and 2023, when the market faced elevated credit defaults, macroeconomic challenges, and heightened volatility. Additionally, investors have favored the more attractive risk/reward profile of global bond funds, especially in light of elevated US Treasury yields in recent years.
Outlook for 2025: A More Cautious Approach
Looking ahead to 2025, fund managers are approaching the market with greater caution. Credit spreads in Asia remain relatively tight, prompting a more measured stance on risk-taking. However, many still find the asset class appealing due to its shorter-duration profile and attractive yields.
Despite the optimism, investors should moderate their return expectations. Much of the outsized performance in 2024 was driven by one-off, idiosyncratic events, which are unlikely to be repeated annually. As a result, while Asian high-yield bonds remain an interesting opportunity, future gains may be more tempered compared to the exceptional rally seen last year.
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