The history and future of Asian bon

The history and future of Asian bond markets


Geoff Lunt
director and senior product specialist for Asian fixed income
HSBC Global Asset Management.
March 6, 2015 1:00 am
Global bond markets have experienced dramatic changes since the heady days of 2000 (remember the tech bubble?), but nowhere has that been more the case than here in Asia, where from previously being a mere backwater of fixed-income investment, we now have a myriad of valuable opportunities.

So how exactly have these markets developed and what might the next 15 years bring?

The most obvious thing to look at is size. The sum of all domestic Asian bond markets (excluding Japan but including India in line with the geographic definition of most indices of 'Asian Bonds') is now probably about US$9.5 trillion (Bt309 trillion), up from maybe just over $500 billion as we entered the new millennium - a staggering increase of some 25 per cent, annualised.

So what has driven that growth? The first factor is the sheer size of Asian economies. According to the International Monetary Fund, the Asian economies which make up the major bond issuers in the region have quadrupled in size from 2000 to 2015, increasing their contribution to global gross domestic product from around 20 per cent to 30 per cent.

But this is not reflected in the nearly twenty-fold increase in the bond markets, so there must be something else going on.

The supercharged growth is also down to the low base of capital market size following on from the 1997 Asian crisis, and the increased need for leverage within economies at that stage of development.

Many Asian economies were 'overbanked' - indeed this phenomenon remains the case in some countries to this day - and there was a substantial need to disintermediate banking systems and encourage a proper credit-creation mechanism.

The first step in this process was to develop a deep and liquid government bond market, and then this gave corporates and other issuers a benchmark against which to price their bonds.

Has the Asian bond market been a good place to invest over the last 15 years? The answer is an unequivocal 'yes'.

Local currency bond index

Investing in the HSBC Asian Local Currency Bond index would have given you an annualised return of nearly 7 per cent in US dollar terms over the 14-year period of the index's life, while the equivalent in US treasuries would be just under 5 per cent.

Meanwhile, global credit would have given you around 5.6 per cent, with a much rockier ride.

People often forget that the Asian markets not only contain emerging markets, but also the bond markets of much more developed jurisdictions such as Hong Kong and Singapore, which act as a safe-haven stabiliser in times of stress.

This situation has dampened the aggregate volatility of the market considerably.

And we shouldn't assume that all the price performance has come from the emerging-market components.

The yield on Hong Kong government 10-year bonds has fallen from 7.7 per cent at the turn of the century (then 1.2 per cent higher than the US treasury yield) to just 1.9 per cent (0.3 per cent lower than US treasuries) at the end of 2014.

This pales, though, beside the performance of the Philippines bond market, where 10-year yields were a whopping 15.6 per cent at the end of 1999, and at the end of last year were standing at just under 4 per cent.

As we move into 2015, the revolution continues. The unusual combination of decent yields and improving credit quality in generally strong, high-potential economies makes Asia stand out against both emerging and developed bond markets.

Meanwhile, the opening up of the domestic Indian and Chinese markets is set to transform the face of global bond investment.

China will begin to make up a substantial part of emerging-market and global government bond indices, as well as being the dominant portion of regional indices.

Investing in Asian fixed-income markets will soon become more mainstream and no longer a niche option, and the future seems very bright indeed.

Geoff Lunt, the author, is director and senior product specialist for Asian fixed income at HSBC Global Asset Management.