Asian investors drawn to Euro bonds

HONG KONG • Asian institutional investors are diversifying away from dollar-denominated United States debt and looking to Europe, encouraged by relatively lower hedging costs for the euro, according to Mr David Fancourt, senior fund manager at M&G Investments.

The increasing appetite for euro- denominated bonds is particularly evident among Japanese investors, he said. "Japanese investors are looking at the 12-month forwards to calculate hedged returns into the yen and concluding it is cheaper to hedge euro investments now. As a result, the yield, once hedged into the yen, is more attractive for European bonds than US bonds."

Mr Fancourt said he prefers bonds that are not eligible for the European Central Bank's bond-buying programme, such as senior bank notes whose "spread differential has widened", over non-financials since the quantitative easing plan. He also said there is value in corporate hybrids, as they have underperformed regular bonds.

When it comes to French corporate bonds, he is cautious. They have been less affected by the selloff that has cheapened more liquid government peers as the election approaches.

Mr Fancourt sees the political risk premium on government debt as "overblown" and reversible. When that happens, sovereign yields will fall, increasing the gap to corporate debt - and making company bonds more attractive.

The reward bond buyers get for picking the debt of French companies over German ones is half what they can expect in the government bond market. French corporate bonds trade with spreads to sovereign notes of 127 basis points, compared with 97 basis points for German peers, according to a Bank of America Merrill Lynch index.

When "spreads move by more than the risk we perceive, that's an opportunity", he said. "Despite all the talk about politics, from where we're standing, we don't see an opportunity."

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A version of this article appeared in the print edition of The Straits Times on March 25, 2017, with the headline 'Asian investors drawn to Euro bonds'. Print Edition | Subscribe