Local Bonds’ Belated Backup Bid
Although foreign ownership of major local bond markets has doubled the past five years to one-quarter of the total, continued heavy outflows in Malaysia, Mexico, Turkey and elsewhere could shift the burden to domestic insurance and pension funds now with $5.5 trillion in assets, according to JP Morgan’s latest global guide. Latin America’s private plans were the pioneer catalyst in the former segment, while Asia’s life insurers dominate the latter $3 trillion pool with institutional allocation for both steered mostly to government fixed-income. In Europe, first Hungary’s and recently Poland’s state social security takeover will reverse progress, although Warsaw will cancel one-fifth of outstanding debt during the transition. Corporate bonds represent 20 percent of the $8.5 trillion local amount, and in the first half $375 billion was issued mainly from China with $200 billion. Brazilian activity was down one-third with higher interest rates, while Korea’s number two position remained intact at $40 billion for the period. The market is double the size of the external one but has no dedicated index like the CEMBI and limited foreign access to primary offerings and scant secondary trading. They lack liquidity and cross-border clearing scope but have fit a post-crisis niche for bank subordinated placement to meet Basle standards. Inflation linkers are worth $550 billion, and 80 percent of Chile’s and 40 percent of Israel’s stock is in that form. Domestic debt otherwise is overwhelmingly fixed-rate and in Russia and Thailand 100 percent is this type. This year the category could again see net outflows as in 2008 with EPFR data negative for the past several months in contrast with occasional equity fund upticks. Bid-offer spreads have recently widened on currency baskets, and quarterly domestic instrument turnover has plateaued at around $1 trillion according to industry association EMTA, partially due to new market-maker rules under the Dodd-Frank law. Capital inflow controls as in Brazil and Indonesia have been lifted or relaxed in the current stress as central banks have mobilized $9 trillion in combined reserves to support currencies, with Asian and Latin American authorities most active.
South Africa has refrained with a limited stockpile after unsuccessful interventions a decade ago, but has not ruled out recourse to an eventual BRICS line that could be established as reaffirmed at the G-20 meeting. Monthly non-resident portfolio accounts shun bonds but are long equities, with non-mining listings preferred as the sector endures trikes and waning world prices. Mexico also spurns interference despite the peso’s drop to 13 to the dollar and structural reform jitters following violent teacher clashes with police. Korea in comparison with 2009 has been lower-profile with reduced foreign currency mismatch and a current account surplus double 2012’s figure as high-tech exports rebound with developed economy improvement. Budget provisions have extended mortgage relief and encouraged renter to owner evolution with loan subsidies but household debt loads over 100 percent of income await further backup plans.
