Bumper 2012 a hard act to follow for Asia's dollar credits

After a bumper 2012, investors in Asia's dollar debt markets are going to find rallies and returns harder to come by this year.

The Asian dollar debt market faces stern challenges in the new year, primarily a potential spike in U.S. yields and the likelihood that emboldened investors rediscover equities.

Returns on Asian dollar bonds ranged from 12 to 24 percent in 2012, with higher-rated investment grade credit at the low end of that range.

A 14-month rally has driven a reduction in both components of the price of these dollar bonds: U.S. Treasury yields, which are the pricing reference, as well as the spread or margin over the Treasury rate.

The risk of near-zero Treasury yields going up on improved U.S. economic conditions and investment moved to the fore this week after U.S. politicians passed a budget bill, thereby averting a fiscal cliff.

That was reinforced on Thursday, when minutes of the Federal Reserve's December meeting revealed reluctance among some members of the Federal Open Market Committee to further expand stimulus.

The second risk factor is the promise of better global growth prompting a shift of investment from the safety of bonds to equities.

Investors aren't taking these risks lightly, but the impact on credit markets could be light, given yields on Asian dollar bonds are high enough to cushion against such risks: Bond investors aren't selling yet.

"I would concur that there is a reasonable spread across most Asian credit products that can help cushion and compensate for some of that movement in treasury yields," said Bryan Collins, a portfolio manager at Fidelity Worldwide Investment, based in Hong Kong. Collins manages approximately $4.5 billion of Asian fixed-income assets.

"That will obviously dampen total return but it may not mean negative returns over a sustained period." Investors have another reason to be sanguine. Even if it doesn't expand asset purchases further, the Fed is committed to substantial monetary easing for months to come.

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