(Bloomberg) -- PineBridge Investments, which runs one of the top-performing bond funds in Asia in recent years, is taking a contrarian view on long-dated dollar bonds from the region, betting there may be an investment opportunity in the beaten-down debt. 

For Omar Slim, co-head of Asia fixed income at PineBridge, markets have turned too pessimistic about the chances for the Fed to lower interest rates this year, with some like Apollo Global Management’s Chief Economist Torsten Slok forecasting no reductions in 2024. The Fed may still cut two times this year, according to Slim, whose Asia Pacific investment-grade bond fund has beaten 96% of peers in the past five years.     

Such a scenario could bring opportunities for investors, in Asia’s oversold longer-duration bonds in Slim’s view. Longer duration Asian high-grade bonds of more than 10-years have lost 5.6% year to date on a total-return basis as investors have adjusted to the Fed keeping rates higher for longer. But that’s still better than a 6.8% slump for US peers and 8.5% drop for comparable US Treasuries, Bloomberg indexes show.

“If the market continues to sell off, we will be looking for opportunities in the long end,” said Slim, citing a preference for some of the region’s quasi-sovereign issuers and corporates. “I’d be kind of dipping more into longer-dated bonds, that is 30 years.” 

The region’s longer company notes are often sold by stronger government-backed borrowers. The quality of the issuers, plus a lack of new debt offerings this year, means that for some investors they offer a less risky bet among longer-dated credits. Markets still expect the US central bank to cut interest rates by about 40 basis points in 2024, even after more hawkish comments from Fed officials last week.      

The losses in global high-grade credit this year on an index basis have been caused by climbing government yields rather than pessimism about corporate balance sheets. Credit spreads on such debt have tightened as recession fears have abated, and yield premiums on US-currency notes from Asia narrowed to a record low this month.

The longer Asian notes have lost less so far in 2024 than peers as spreads have tightened more. Yield premiums on longer Asian credits with a duration of more than 10 years have tightened 11 basis points so far this year, compared with a two basis point decline for comparable US corporate notes, according to Bloomberg indexes. 

“We’ve seen real material spread compression despite the pull higher for yields” in longer Asian bonds, said Leonard Kwan, a portfolio manager at T. Rowe Price in Hong Kong. “What that points out to me is that in the tug of war between all-in yield buyers versus spread-sensitive buyers, the all-in yield buyers continue to believe that current yield are attractive.”

The average yield on the longer-dated Asian credits is currently 5.8% up from 5.2% at the end of 2023, according to Bloomberg-compiled data.   

Some of the best-performing long bonds from Asia this year have been commodity-related long bonds of Asian issuers like state-owned Indonesia Asahan Aluminium PT. Debt of Chinese tech names including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. have eked out small profits year to date.

Goldman Sachs Group Inc. credit strategist Kenneth Ho earlier this month reiterated his preference for superlong Indonesian corporate bonds. 

The argument for longer bonds isn’t complicated if rate cuts are on the way but investors have been burned multiple times in recent years as inflation has surprised to the upside. A simple rule of thumb for bonds is that for every 1% change in interest rates, the price of the debt will change by that amount multiplied by its duration. A bond of 30 years in duration would therefore likely rise about 15% if rates fell by just half a percentage point.      

The choice is less ambiguous for some investors, like insurers in the region, who need to match liabilities and pay policyholders.   

“We need that long duration exposure,” said Mark Konyn, Chief Investment Officer at AIA Group, in a Bloomberg TV interview. “For us we’re matching out cash flow.” 

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Still, after spreads on longer duration Asian bonds tightened more this year, there’s a risk they could widen further if the Fed is ultimately unable to cut in 2024, causing even larger losses.  

After positioning defensively in the first quarter on longer debt, PineBridge’s Slim is more sanguine about the outlook and expects the Asian bonds to do better, due in part to their rarity.   

“Because there’s less issuance they tend to outperform,” he said. “It doesn’t mean that they’re not vulnerable, but it means that they’re probably less vulnerable than some of their peers in other markets.” 

--With assistance from Yvonne Man and David Ingles.

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