Asia’s bond markets have historically had only a peripheral part in global portfolio allocations. Although there has long been a so-called Asia yield premium, limited secondary market liquidity, poor name-recognition and a scarcity of new issuance limited the potential for investors.
There is still a generous yield premium, but higher issuance volumes, familiarity, re-ratings and increased variety are making Asian bond markets more mainstream.
They have also been resilient during volatile markets and delivered strong performance amid a constructive risk backdrop. Yields on Asian investment grade corporate credit range between 0.6% and 1% higher than global peers, yields on sub-investment grade Asian bonds are currently more than 6%, compared with around 4% in the US and Europe.
Companies across the region have taken advantage of low global interest rates to raise trillions of dollars’ worth of debt to fuel their expansion. Asian firms raised $1.1trn in bonds for the year to 21 November 2016, compared with $260.8bn for all of 2008, according to Dealogic. This continues a trend of increasing issuance throughout the decade, and stronger investor demand.
In fact, a recent survey conducted by East & Partners, a market research and consulting firm, found that international bond investors are allocating more assets to Asia, increasing credit and interest rate risk. As many as 77% of 152 asset managers in Asia, Europe and North America, with average funds of $3.73bn, intend to add Asian fixed income to their holdings.
The hard-currency Asian debt market – represented by the JPMorgan Asia Credit Index – is easily accessible and offers 1,055 issues worth a total of around $668bn as of end December 2016.
Moreover, nascent bond structures are evolving that give investors more options. A raft of new loss-absorbing bank capital hybrid bonds is expected in 2017. Meanwhile, countries throughout the region have ambitions to improve their power capacities and transport networks and are likely to tap into Asia’s liquidity and investors’ demand for higher yields and longer maturities. The potential of the infrastructure sector has been further highlighted by China’s One Belt, One Road strategy.
Asia’s local fixed income markets are also developing rapidly. Despite restrictions to mitigate foreign exchange rate volatility from overseas flows, these markets – most notably China’s $7.5trn interbank bond market are opening to foreign investors.
Local markets are vulnerable to foreign exchange volatility and US-dollar refinancing risk is a key issue for some highly-leveraged Asian companies.
However, Asia’s economic growth continues to surpass other regions’ and stability is buoyed by current account surpluses. It is healthy environment for the continued transformation of Asia’s bond markets.