KUALA LUMPUR (July 4): Asian bond yields are at multi-year highs and investors should seize the opportunity to buy into investment-grade papers, Eastspring Investments said.

Historically, when Asian investment-grade bond yields exceed 5%, the 12-month returns are positive over 80% of the time, Eastspring said. Compared to similar US and European bonds, Asian bonds also offer better trade-off between income and risk from higher yield per unit of duration, it noted.

“The macro backdrop of moderate growth and muted inflation in Asia is positive for Asian bonds,” according to portfolio managers Rong Ren Goh and Wai Mei Leong. “With rate cuts largely priced out in Asia, Asian bonds can potentially enjoy a larger boost when central banks eventually lower rates.”

Bond yields in Asia have largely risen amid stronger belief that current elevated interest rates will stay for a longer period as inflation has been decelerated slower than expected. Bond yields and prices move inversely.

Within the emerging East Asia, a region that includes Malaysia, investors have dumped US$20 billion (RM94 billion) worth of bonds in March-April, according to the Asian Development Bank. Regional currencies have also depreciated against the US dollar.

So far this year, the yield on Malaysia’s benchmark 10-year government bonds maturing in November 2033 has risen by about 13 basis points, tracking the spike in yields at the US Treasury as strong growth and high inflation in the world’s largest economy pushed the Federal Reserve to delay rate cuts.

The benefits of elevated bond yields are “under-appreciated”, said Eastspring, the asset management arm of Prudential plc. “For one, investors do not need to take on significantly more credit risk to enjoy meaningful yields.”

Healthy external demand is helping the more export-dependent Asian economies such as South Korea, Taiwan, Malaysia and Singapore “sync up with other economies in the region that had benefited from strong domestic demand”, Eastspring noted.

If inflation picks up again, rates will need to rise significantly, resulting in capital losses for bonds, which Eastspring said is unlikely for now.

Bonds would also outperform equities if there is a “hard landing” for the US economy while US Treasuries and investment-grade bonds are likely to be more resilient than high-yield bonds, providing the “much needed portfolio diversification”, Eastspring added.