With the United State's super-committee failing to produce any real results and Europe continually kicking the "can down the road," many bond investors continue to face a wall of worry. Both downgrades and defaults have put these once safe-haven assets firmly into risk category. For investors looking for stability and safety, the developed nation bond market isn't what used to be. However, the Pacific Rim could be the answer to bond investor's prayers.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
On the Path to Safe Haven Status
In the face of developed market budget issues, soaring public debts and downgrades, emerging Asia's fiscal house is quite pristine. Believe it or not, a variety of nations within the region, based on sovereign credit risk, are on par, if not better, than their developed market counterparts. Government bonds from South Korea are as safe as any German bonds. China's credit score is nearing the U.S., and Thailand and Malaysia offer higher rated securities than of southern European PIIG'S. For investors, the Pacific Rim could be the prime choice for those looking to find great yields and regain some sense of security.
These low debt rates, coupled with Asia's fast growth, have prompted an assortment of investment firms to declare the region's debt "new safe havens." Analyst Donald Amsted at Aberdeen recently wrote in a report that, "I can see no reason why Asian bonds should not be the asset class of choice for any investor looking to protect asset values over the medium term." This echoes similar statements made by BlackRock (NYSE:BLK) and Goldman Sachs (NYSE:GS), in which they cited the region's move towards that coveted status.
Betting On Asia's Dominance
While the U.S. bond market won't be going away anytime soon, as it's far too large and liquid, Asia should continue its rise and move into the second spot. For longer termed investors, adding exposure to the Asian bond markets could be in order. Funds like the Market Vectors EM Local Currency Bond ETF (Nasdaq:EMLC) or iShares JPMorgan USD Emerging Markets Bond (NYSE:EMB), can provide access to the entire EM debt spectrum. However, recently a plethora of new ETFs have launched, providing direct access to the region. Here are a few picks.
The WisdomTree Asia Local Debt ETF (NYSE:ALD) could be the easiest way to add a wide swath of Asian bonds to a portfolio. The ETF spreads its $400 million in assets into bonds from nations like Malaysia, Thailand and Singapore, and currently yields 2.32%. For investors looking to snag Asian bonds at a discount, the Aberdeen Asia-Pacific Income Fund (NYSE:FAX) is currently trading at a 4% discount to its NAV.
With $3,000 billion in foreign reserves, China will be the leader at creating a more liquid Asian bond market and could see its sovereign debt as the new global safe haven. Yuan denominated or Dim Sum bonds have recently been opened to foreign investors. The PowerShares Chinese Yuan Dim Sum Bond (Nasdaq:DSUM) can be used to make a calculated bet on Chinese bonds. While the fund is new, it does offer the best liquidity versus its new peers, the Guggenheim Yuan Bond (NYSE:RMB) and Market Vectors Renminbi Bond ET (Nasdaq:CHLC).
The Bottom Line
For bond investors, the recent budget and debt problems facing the developed West are a cause for concern. However, the Pacific Rim could be the best solution to finding a new safe-haven. Strong demographics, rapid growth and fiscal responsibility are major highlights of the region. Adding the previous ETFs, along with the Barclays GEMS Asia-8 Currency ETN (NYSE:AYT), make ideal ways to play Asia's continued dominance and strength of its economies. (For more on ETFs, see Using ETFs To Build A Cost-Effective Portfolio.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.