Asian Corporate Bonds’ Lopsided Lurch
The Asian Development Bank issued its 2010 local bond market retrospective in advance of its annual meeting which is to focus on inflation and supply chain complications from rising commodity prices and Japan’s natural and nuclear disasters. East Asia’s domestic debt size passed $5 trillion, with corporate issuance up 20 percent to $1.5 trillion as central bank and government activity tapered toward year-end. Companies in China, Vietnam, Indonesia and Korea were particularly engaged, but a first-time analysis shows that only a handful of prime-name placements dominate individual markets. The official segment still comprises 70 percent of the regional amount outstanding, with Malaysia and Thailand recently experiencing spurts, and yield and appreciation-seeking foreign investors buying and trading heavily despite increased inflow curbs. Maturity profiles have extended and flatter yield curves have now turned steeper with monetary policy “normalization” to recapture pre-crisis real rate levels. External volume in the euro, dollar and yen hit $100 billion since the start of last year through March, a growth pace double the local strides. Mainland Chinese paper is inaccessible except to authorized interbank dealers although Hong Kong’s fledgling “dim sum” tier provides renimbi exposure and Exchange Fund bills there have become a popular proxy as evidenced by the latest survey of the NY-based Emerging Market Traders Association. Both private and state-owned banks and enterprises feature in the corporate space, with Korea by far the former category standout. Islamic-style fixed-return versions have proliferated, but Malaysia remains the area hub and is expected to further bolster its status as Middle East offerings are redirected on prevailing unrest. The international ownership stake for Indonesian instruments is 30 percent, but concentration in short-term central bank bills subsided with holding limits and new open market operations channels. For the group, only a minor portion of maturities are greater than 10 years, and turnover ratios outside China’s are low.
The Philippines at $8 billion was the biggest external sovereign player in 2010, followed closely by Indonesia. Korea and China topped the international corporate list, with banks and energy companies prominent. The pan-Asian bond index rose 10 percent but still lagged equity counterparts, while the Malaysian ringitt and Thai baht saw double-digit advances versus the dollar. Through Q1 of this year, performance has reversed with the MSCI Asia reading negative as a whole, while the local fixed-income benchmark is flat. The update predicts that “risk on-risk off behavior” will stir additional volatility as inflation and growth ingredients in the mix are shaken.
