Known as short-duration leveraged funds, these fixed income products offer higher yields relative to bank deposits without being exposed to the corrosive effects of rising or volatile interest rates. Bond prices move inversely to yields.
Increasingly popular in Singapore and Hong Kong, some private banks are offering leveraged versions of these products to clients where investors can magnify their returns, though they also risk taking a bigger hit if they are forced to liquidate their investments when they are under water. "These products are selling like hot cakes among our clients and with the BOJ move last week, we are fielding a lot of enquiries from our clients," said a banker at a private bank in Hong Kong who declined to be identified.
The Bank of Japan said last week it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).
Earlier in January, the ECB indicated it could cut rates further in March while Australia and India held interest rates steady at their policy meetings on Tuesday. nL3N15G62S In contrast, the US Federal Reserve has so far stuck to the script that it will gradually raise interest rates this year, even though bets have been pared back with Federal Fund rate futures 0#FF: pricing in barely one hike this year.
For the nearly $1 trillion-and-growing Asian credit markets, the direction of trajectory of US rates are more important because an overwhelming majority of international debt is denominated in the greenback.
While a JP Morgan index of Asian investment grade credit is trading near a record low of 4.8 per cent, it still offers a fat spread relative to their government bond counterparts.
Ten-year US Treasuries are offering 1.94 per cent while 10-year Japanese bonds are flirting with negative rates.
Though these products are less exposed to capital losses because of their investments in short-dated securities, some of their holdings are in the high yield category, a space which is likely to face more downgrades this year, according to Moody's Investors Service, a ratings agency. "The growing popularity of these funds is one reason why Asian credit spreads haven't risen as sharply as some of their counterparts elsewhere," said the head of credit trading at an Asian bank in Hong Kong.