(Bloomberg) -- Money managers including T. Rowe Price Group Inc. believe Asian junk dollar bonds have further to run after outperforming almost everything else in debt markets this year.

The notes have returned 9.8% year-to-date compared with about 3% for global speculative peers and losses across much of high-grade debt this year, Bloomberg indexes show. The outperformance is driven in part by a rebound in Chinese junk debt from record lows as authorities in Beijing throw their weight behind steps to pull the nation’s property market out of an unprecedented slump.

Junk bonds around the globe have been outperforming better-rated peers for most of this year. Stubbornly high inflation has held back central banks in many countries — most notably in the US — from cutting interest rates, even if falling Treasury yields this week buoyed bond markets in general. Speculative-grade Asian dollar bonds in particular have rallied, after trailing their global peers in the wake of record defaults on dollar debt by Chinese property developers.

“There continues to be appeal in high yield, including in Asia,” said T. Rowe Price’s Leonard Kwan, a portfolio manager of the firm’s dynamic EM bond markets strategy. The Asian debt has “attractive all-in yields, a shorter duration profile and is exposed to a stabilizing and solid growth outlook for China and India respectively.”   

At this point, Chinese junk bonds also contain a much smaller share of property debt, which as a sector was once the biggest seller of speculative-grade bonds in Asia until a government-orchestrated crackdown on leverage begun before the pandemic triggered record defaults. After handing investors a cumulative 50% loss between 2021 and 2023, the Chinese notes have returned about 9.7% this year, a Bloomberg index shows.     

“You can’t ignore emerging markets because there are segments of EM doing phenomenally well,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management. “We do like China high yield, also an out-of-consensus bet.”

Away from China, Vedanta Resources proved one of the best performers this year, with some of its dollar bonds climbing about 50% as the miner benefited from higher commodity prices and a deal with creditors to extend some maturities. Meanwhile, several sovereign Pakistani bonds have climbed more than 30% this year, as sentiment about the government’s ability to repay its debt improves.  

Still, risks remain with some analysts saying that Chinese authorities need to do more to address the supply-demand mismatch in the housing market which has cast a shadow over the entire economy. Pakistan is also still struggling to recover and just raised taxes to bolster its chances of securing a new loan from the International Monetary Fund, which is critical for it to meet debt payments. 

With a large swathe of global fixed income generating losses this year, as the Federal Reserve holds rates on pause in the face of stubborn inflation, some investors such as Julio Callegari at JPMorgan Asset Management still favor Asian junk debt for earning income in a higher-for-longer environment.  

“There are still good opportunities in Asia high yield,” said Callegari, CIO of Asia Fixed Income at JPMorgan Asset Management, even without going into Chinese property debt. 

Excluding such bonds, the Asian credits still offer a “decent pick-up” of about 150 basis points versus developed-market high yield, he said.  

Click here to listen to Arcmont discussing private credit’s double-digit returns, which it says are here to stay.

Week in Review

  • A repricing wave in the leveraged loan market is helping risky companies cope with the “higher for longer” message from the Federal Reserve.
  • Trading in the debt of French lenders has taken off after President Emmanuel Macron’s decision to call a snap election unleashed market volatility.
  • Donald Trump promised to lower the corporate tax rate to 20%, further reducing the income levy on the largest US companies that he already slashed while president, according to people familiar with the remarks.
  • Credit investors have spent much of the year wondering when foreign demand for high-grade US corporate bonds will wane, but so far it is showing signs of strengthening as the macro outlook for the American economy improves.
  • Pacific Investment Management Co. expects more regional bank failures in the US because of a “very high” concentration of troubled commercial real estate loans on their books.
  • The list of Chinese developers facing court-ordered liquidation in Hong Kong is getting longer, after a builder of homes in an affluent eastern coastal region was ordered to wind up.
  • Investors ought to be careful about piling on debt when purchasing so-called synthetic risk transfers, according to Varun Khanna, co-head of KKR & Co.’s global asset based finance investment strategy.
    • SRT trades are meant to shift loan risks out of the banking system, but the use of leverage by buyers of the complex securities is calling that into question.
  • Hertz Global Holdings Inc. is in discussions to raise $500 million of senior secured debt from investors at a 12% coupon.
  • Home Depot Inc. is sounding out investors for a corporate bond sale that could total $10 billion to help fund its acquisition of SRS Distribution Inc.
  • MidOcean Partners LP said it raised $765 million in commitments for its opportunistic credit fund, which will invest in mid-sized businesses including ones that are likely to pursue so-called liability management exercises.
  • Red Lobster faces tough choices and may not turn its fortunes around. Its most likely savior is Fortress Investment Group, a Wall Street firm that manages $48 billion and scouts opportunities in distressed companies.

On the Move

  • Jeanmarie Genirs, the head of Deutsche Bank’s global risk syndicate desk, has left the bank.
  • Bank of Montreal is hiring Matt Lynn, RBC Capital Markets’ former head of leveraged finance for technology, media and telecommunications. Meanwhile, Blake Holden, vice chair of the financial-sponsors group, is leaving the bank at the end of the month.
  • Maureen D’Alleva, head of collateralized loan obligations at TPG Angelo Gordon, is set to leave the firm at the end of the year.
  • Bank of Montreal’s Sam Chaturvedi is leaving the Canadian lender to join Wells Fargo & Co.
  • Goldman Sachs Group Inc. promoted five senior executives across its investment-grade capital markets and risk management units covering Europe, the Middle East and Africa. The new leaders are Jans Meckel, Matthew Straughen, Edoardo Ravà, Trent Wilkins and Yakut Seyhanli.
  • Morgan Stanley is hiring three UBS Group AG bankers in Tokyo, as the Wall Street firm builds out sales of structured investment products to Japan’s regional lenders. The trio includes Tetsuya Miura, Keitaro Tsukamoto and Katsuyuki Utata.

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