Call on KBND for opportunities in the Chinese bond market

Emerging market bonds languished in 2022 as the US dollar and interest rates rose, but the asset class is seen as a potential rebound candidate in 2023 as some emerging market central banks pull back from rate hikes as inflation cools. As might be expected, China looms large in the emerging market debt discussion.

Some fixed income market observers noted that last year’s headwinds, including the real estate industry’s woes, are in the rearview mirror, and exchange-traded funds such as the KraneShares Bloomberg China Bond Inclusion Index ETF (KBND) could be worth evaluating this year.

KBND tracks the Bloomberg China Inclusion Focused Bond Index and holds mostly Chinese government bonds and investment grade corporate bonds, indicating that credit risk is relatively limited compared to other emerging market corporate bond ETFs. Speaking of credit risk, it remains a focus for portfolio managers this year.

“For 2023, we expect total returns to be in the double digits and to be led by the opening of China and the reversal of tight policies there. Again, from both a macro and micro perspective, the outlook is uncertain,” said BNP Paribas, head of emerging markets corporate bonds, Alaa Bushehri. “It involves the themes of inflation, recession risks, rates, geopolitics and the risk of credit events, be it a single name, sector or region. We are posting a very low probability as to the risk of a credit event. But we are in EM companies and that is an aspect we always have to pay attention to.”

At the end of 2022, KBND had 35 bonds and a 30-day SEC yield of 1.95%. That’s not particularly high, but it can be inferred as a confirmation of quality. In addition, KBND provides access to China’s $13 trillion onshore bond market, which is increasingly liberalized for international investors.

KBND isn’t just an entry story, it’s a shorter-lived one with the potential for looser monetary policy as China seeks to stimulate the world’s second-largest economy amid slower global growth.

“So the EM corporates benchmark is now about two years shorter in duration, but it’s better in terms of ratings: it’s investment grade. Emerging market government bonds are high yielding. That said, looking at relative value, we ended 2022 with corporate bonds outperforming a bit,” Bushehri concluded.

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The opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation of any product.