Harnessing Fixed Income to Broaden Your Investment Horizons

Traditional fixed income options

Typically, when investors consider the fixed income allocation within their portfolio, they often gravitate towards established, well-recognized options, such as US Treasuries, global aggregate bonds, or the corporate bonds of large, stable companies.

There are good reasons for this. Traditionally, the role of fixed income in a portfolio is to provide stability and security, so having exposure to potentially lower-risk bonds makes sense to many investors. Combined, investment grade bonds account for a large proportion of fixed income market value worldwide, meaning they have enormous depth and range.

However, as the bond market continues to evolve, more investors are expanding their horizons and using these ‘traditional’ exposures alongside a broader set of other bond exposures to create a more diversified fixed income strategy.

What are the alternatives?

As we saw in Why include bonds in a portfolio , the range of fixed income vehicles is now broad enough, from publicly traded government and corporate bonds through to private credit, to accommodate any risk appetite and return profile. There is also a growing geographical range, from developed to emerging and frontier markets.

One area of growing interest to investors is Asian local currency bonds. These are playing an increasing role in fixed income portfolios, and continue to grow in size. The total size of Asian local currency bonds from government through to corporate bonds outstanding has grown to a record US$34.5 trillion in 2023,¹ while Asian G3 currency bonds outstanding (those not issued in local currency, but in USD, EUR or JPY) totalled US$108 billion in 2023.²

Why consider Asian local currency bonds?

Vibrant economic growth – Asia is home to a mix of vibrant economies (both developed and emerging) with growth potential ahead. Continued economic expansion means that businesses remain invested in their growth and development, while governments issue more bonds to provide services and infrastructure to maintain the pace of growth, and are able to fund the debt through increased tax revenues. All this leads to more dynamic local bond markets, which present a good opportunity for investors to diversify their fixed income exposure.

Solid returns – Over the past decade, Asian local currency government bonds have delivered robust risk-adjusted returns. Drawdowns (declines from peak value during rate cycles) have also been historically less in Asia.³

Investment quality – Investors can find a broad range of risk and return characteristics within the Asian local currency government bond sector, from the top-rated sovereign bonds of Singapore (rated AAA) through to lower rated but still investment grade and higher yielding bonds of Indonesia and the Philippines. By combining a diverse range of exposures, a broad Asian local currency government bond investment offers diversified exposure at a relatively high average quality.

Low correlation with traditional developed markets – While global economies are now more interconnected than ever, we have also seen in recent years some cases of divergence of central bank policy decisions due to differences in domestic economic conditions that they face. The divergence in conditions and policy actions present a set of diverse opportunities at any given time, and a well-diversified investor is best positioned to take advantage of such opportunities.