DESPITE the rising headwinds facing the global bond market this year, there are still opportunities for investors to position for some gains this year.

       The China bond market, for instance, is currently seen as providing pockets of value after the recent sell-off, according to Asset Hwang Asset Management senior director of fixed income Esther Teo.

       She also considers corporate bonds in Malaysia attractive.

       “We see pockets of value in China bonds, following the indiscriminate sell-off in the property sector.

       “We also favour Malaysia corporate bonds for its carry as domestic bond yields have risen,” she explains.

       Overall, Teo shares her team is taking a cautious and defensive approach to fixed-income in 2022 in light of headwinds stemming from a rising rate environment and tapering of liquidity.

       She notes there are uncertainties stemming from growth and inflationary outlook.

       “We prefer shorter-tenure bonds to reduce duration and inflation risk,” she shares.

       Monetary policy tightening and inflation will be key watchwords for fixed-income investors in 2022, as the prospects of higher interest rates could cast a pall over bond markets, she points out.

       The United States Federal Reserve (Fed) has already guided that it intends to accelerate its tapering of bond purchases.

       This would pave the way for around three interest rate hikes by the central bank of the world’s largest economy in 2022 in response to elevated inflation.

       “Liquidity withdrawals and a rising rate environment will be headwinds for fixed-income assets that could lead to a widening of credit spreads. Investment grade credit spreads are close to historical tight levels,” Teo says.

       “We see opportunities in the high-yield space, especially in China’s property sector, which is trading at attractive levels due to an ongoing sector crisis where default rates have climbed up significantly,” she adds.

       Due to the bond price distortion, certain bond issuances have been sold-off indiscriminately, Teo notes, adding however, her team is taking a very selective approach as some property developers there might not be able to survive the crisis.

       “For offshore bonds, we see opportunity in select quality names that are trading at distorted levels as mentioned above,” Teo explains.

       “In the onshore market, we continue to like this space too as Chinese government bonds are trading at a premium versus peers.

       For example, the 10-year China government bond, or CGB, is trading at 2.8% which is 140 basis points higher than US Treasury.

       The sector could benefit further from a gradual opening of capital markets and its inclusion into any major bond indices,” she says.

       Indeed, the unravelling of the Evergrande debt saga has jolted the China’s bond market since last year.

       In addition, there are concerns as signs that the world’s second-largest economy is heading for a slowdown have emerged.

       Teo, however, sees reason to remain optimistic, citing China’s policymakers plan to roll out fiscal stimulus measures.

       “Beijing has shifted its policy focus to supporting growth; policymakers have repeatedly emphasised its priority for economic stability.

       “As such, we do not expect a sharp contraction in growth,” she explains.

       Nevertheless, Teo concedes that any impact from fiscal stimulus measures would be gradual as China’s government is mindful not to over-stimulate its economy as that could lead to financial instability.

       As such, recovery is only expected for China’s economy towards the second half of 2022.

       Globally, Teo expects economic recovery to be patchy and uneven as uncertainties surrounding Covid-19 continues to linger in 2022.

       “Developed markets (DMs) are expected to outperform emerging markets (EMs), as DMs adopted a more aggressive stimulative stance to combat downward pressure arising from the pandemic in the form of rate cuts and handouts such as unemployment benefits,” she says.

       “In addition, central banks in EMs are embarking on its tightening policy cycle to tamp down inflation which is piercing new highs.

       “This is especially in Brazil and Mexico where strong inflation has fuelled pressure for rate hikes,” she notes.

       Throughout 2021, EMs were challenged on the back of a strong US dollar environment, weak domestic growth and rising rates.

       Teo expects this theme to continue into the first half of 2022, mainly driven by growth divergence.

       Inflation remains one of the key risks to market, she reckons.

       The base expectation is that inflation should start trending downwards by mid-2022 as commodity prices peak and the supply chain crunch eases.

       However, Teo says, “if inflation proves to be stickier especially on the higher side globally, central banks will be pressured to raise rates further.

       This poses a challenge to the current low interest rate regime and needs to be reassessed by global policymakers and investors”.