Goldman has lost interest in Asia's high-yield bonds. What does he advise instead?

Goldman Sachs recommended clients to reduce the share of Asian high-yield bonds (HY) in the portfolio, replacing them with dollar-denominated debt securities with lower yields but investment-grade credit ratings (IG). One of Wall Street's largest investment banks pointed to concerns about the state of the U.S. economy and the increased likelihood of a U.S. Federal Reserve interest rate cut.

"As concerns about [economic] growth in the U.S. have intensified again and asset valuations have reached even higher levels relative to the end of 2024, we believe now is the time to revert to an 'outweigh IG over HY' stance in Asia," Bloomberg quoted Goldman Sachs economists Kenneth Ho and Sandra Yang as saying in a note sent to clients late last week.

Thus, Goldman Sachs returned to the recommendation, which it adhered to at the beginning of 2025, notes Bloomberg. In May, the bank took a neutral position after the sell-off caused by the announcement of U.S. President Donald Trump on duties. According to Goldman strategists, the defensive nature of investment bonds makes them attractive against the backdrop of the upcoming easing of the Fed's policy, while any weakness in the debt market could lead to a backwardation of "junk" securities.

Within the Asian debt securities market, Goldman Sachs sees the most value in BBB-rated bonds such as Hong Kong real estate developers' paper and subordinated bank capital - as well as investment-grade Chinese bonds, which have the widest risk premiums, Bloomberg reports.

On August 7, Goldman Sachs vice chairman and former president of the Federal Reserve Bank of Dallas Robert Kaplan told Bloomberg that the U.S. labor market may actually be weaker than "headlines about the unemployment rate" indicate. Current Fed officials are increasingly concerned about the labor market and are "signaling their readiness, if not impatience, for a rate cut as early as September," Reuters writes.

Traders are now pricing in a 90% probability of an interest rate cut at the Fed's September meeting. Prior to the August 1 employment report, which showed a weakening labor market in the U.S., this figure was 40%, Barron's emphasizes.

According to Bloomberg, in early August, against the backdrop of weak U.S. employment statistics, investors began demanding higher yields for Asian high-grade bonds, as a result, the difference in yields between them and benchmark debt securities began to grow at the fastest pace over the past four months. But then the market calmed down and the spread almost returned to its previous level.

This article was AI-translated and verified by a human editor