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Bonds rally everywhere in May with bulls saying sell-off is over

SINGAPORE (BLOOMBERG) - Bonds in almost every corner of the US$63 trillion (S$86.2 trillion) global debt market are bouncing back as investors begin to see value once again in fixed-income assets.

Global investment-grade debt returned almost 1 per cent in May, the first monthly gain since July, while United States Treasuries are heading for their best month since November, according to Bloomberg indexes.

A gauge of global corporate debt is set for its biggest advance since July, while emerging market sovereigns from Mexico to Malaysia are also in the green.

Investors point to a bevy of reasons for the recovery. These include signs the global economy is in danger of recession, speculation the rush of central bank interest rate hikes is now largely priced in, and the simple fact that yields have risen enough to make them attractive.

"I expect global bonds to deliver positive returns for the rest of this year," said Mr Akira Takei, a global fixed-income money manager at Asset Management One in Tokyo, who has been buying Treasuries. "Yields have fallen from their peaks because more and more investors see value in bonds. The worst of the bond market is behind us."

Asset managers including pension funds and insurers last week ramped up bullish wagers on Treasuries to the highest levels since April 2020. At the same time, JPMorgan Asset Management, Morgan Stanley and Pacific Investment Management have all gone on record saying the worst of the global debt sell-off looks to be over.

The rally in bonds has already pushed US 10-year yields down to 2.74 per cent from a three-year high of 3.2 per cent set in early May. Yields on similar-maturity German bunds have dropped to 1.06 per cent from a peak of 1.19 per cent three weeks ago.

"It is a good time to increase your allocation to fixed income," said Mr Tai Hui, chief Asia market strategist in Hong Kong at JPMorgan Asset, which oversees US$2.5 trillion. "With the valuation de-rating in fixed income - if you look at credit spreads, if you look at risk-free rates - the fixed-income world is starting to look attractive again."

There are some laggards, of course. Investors remain skittish on Chinese debt as Covid-19-linked lockdowns and uncertainties over the nation's troubled property market deter buyers.

While returns have generally been picking up, credit spreads have still widened in some areas, including Asian investment-grade bonds, amid skepticism about whether the fixed-income recovery will last.

"Credit investors should position for a potentially bumpy ride over the foreseeable time horizon," said Mr Paul Lukaszewski, head of corporate debt for Asia-Pacific at Abrdn in Singapore. "We continue to see China as our biggest source of credit risk in Asia."

Just last week, a surprise proposal by state-backed Greenland Holdings to delay a bond repayment sparked fears of wider contagion risks among even higher-rated Chinese developers.

Meanwhile, in sovereign markets, Sri Lanka has fallen into default, while concerns are mounting over Pakistan. Others are more optimistic, even on China.

Asian corporate bonds will soon be attractive for investors who believe an economic slowdown remains a way off, said Mr Neeraj Seth, head of Asian credit at BlackRock in Singapore.

"If you are not worried about recession right now, you are getting closer to the point where it is an attractive entry point in the market from the credit or fixed-income side," he said in an interview on Bloomberg Television.

"We are positive on investment-grade credit and selectively on high yield (in Asia)," he added.