In the beginning of the year, Invesco Investment stated that Asian high-yield bonds showed strong performance. As of May 2024, the total return of the J.P. Morgan Asia Credit Index (JACI) high-yield bonds reached 9.2%. Year-to-date, Asian high-yield bonds significantly outperformed European and American high-yield bonds, with the latter two asset classes recording negative total returns. The total return of Asian high-yield bonds was mainly driven by the excess return of the real estate industry (accounting for about one third of the total index return). However, as of May 2024, the lowest yield of high-yield bonds in the real estate industry had dropped significantly from a high of over 25% in September 2023 to below 17%. In the non-real estate sector within the high-yield index, yield spreads have narrowed, leading to yields of around 7.5%, lower than the U.S. high-yield index. For investors focusing on Asian high-yield bonds in the second half of the year, the following three key themes are worth noting: 1. Focus on returns and favor short-term high-yield notes; 2. High-yield bond supply rebound, but credit selection is key; 3. Relative value between Asian high-yield and Asian investment-grade bonds. Focus on returns and favor short-term high-yield notes As highlighted in the 2024 investment outlook, security selection is key, and investors can identify fundamentally strong companies with resilient business models that can withstand rising interest rates. Given this, investors are optimistic about high-yield-rated companies with free cash flows exceeding short-term debt due, and believe that the short-term high-yield notes of these issuers can provide attractive risk-adjusted returns for yield-focused investors. In the short-term high-yield bond space, investment can be made in the entire capital structure of Asian champion banks, as they have ample capital and reserves. Investment can also be made in the Macau gaming industry, as profit recovery continues to accelerate, driving industry issuers to maintain deleveraging models. Following recent spread corrections, there are decent opportunities in the Indian renewable energy sector. High-yield bond supply rebound, but credit selection is key As discussed in the second quarter outlook, narrowing spreads have reduced the overall financing costs of Asian high-yield companies. In this situation, the issuance volume of Asian high-yield bonds is expected to increase, providing new investment opportunities. In 2024, the total issuance volume of Asian high-yield bonds was $5.6 billion, almost equivalent to the total issuance volumes of 2022 and 2023 combined. There have been changes in the composition of issuers, with Indian issuances accounting for nearly half of the total issuances in 2024. The relative spread tightening of Asian high-yield bonds has been offset by the high yield of U.S. Treasury bonds. This year is one of the years with the highest coupon payments for high-yield bonds, averaging 8%. This aligns with the theme of credit selection, capturing returns through robust credit approval processes. Asian high-yield versus Asian investment grade relative value In terms of relative value between Asian high-yield and Asian investment-grade bonds (excluding real estate issuers), it is noted that as of May 2024, the increase in high-yield bond yields has steadily declined from 3.5% at the end of 2023 to 1.9%. Therefore, the additional yield spread increment of the high-yield asset class has become less attractive. However, Asian high-yield bonds still offer industry and country exposure differentiation that Asian investment-grade bonds do not have, with higher yields and shorter durations providing benefits during periods of interest rate volatility. In terms of income and risk-adjusted yield spreads, higher coupon new-issue high-yield bonds are expected to provide attractive opportunities during the current interest rate volatility period. Flexible allocation between investment-grade and high-yield bonds will be a key source of excess returns, allowing fund managers to select the best risk-adjusted credit ideas across all ratings and industry ranges.