Asian Fixed Income: A 15-Year Retrospective Tells a Remarkable Growth Story
Rewind the clock to 1998, the Asian financial crisis sparked a massive devaluation of Asian currencies, with many plunging by 30–40%. This exposed the danger of taking on short-term foreign-currency debt while relying on long-term local currency-generating assets for repayment – a currency and a maturity mismatch.
The 1998 crisis was a catalyst for the creation of active local currency bond markets in the region. Since then, Asian policymakers have been undertaking a variety of market-reform initiatives. Some critical measures include:
The start of the Asian Bond Market Initiative (ABMI) by ASEAN+3 in 2002 to strengthen financial stability via the local currency bond markets
The launch of the Asian Bond Fund 1 (ABF1) in 2003 that pooled USD 1 billion of international reserves from eight central banks to invest in the USD-denominated sovereign and quasi-sovereign debt of those same eight countries
An extension of ABF1 – named ABF2 – in 2005, this time with USD 2 billion invested in local currency bonds of the eight countries
The signing of a New ABMI Roadmap in 2008 by ASEAN+3 ministers and the establishment of various task forces to address specific local currency bond market issues
In this article, we will take a retrospective look at the Asian bond markets – particularly the local currency space – exploring how it has matured into a class of its own and is set to become a new global core.
Increase in Issuance
When ABF2 was launched 15 years ago, the Asian local currency bond space was a fraction of the size it is today. Since then, its growth has been exponential. In China, for example, the market went from USD 617 billion at the end of 2004 to over USD 12 trillion by December 2019.1
While other markets have not matched the levels of growth seen in China, we still see some impressive figures. The overall Asian local currency bond markets continue to expand, with assets growing eight-fold from approximately USD 2 trillion at the end of 2005 to USD 16 trillion in December 2019.2
Growing Foreign Investors' Participation
Ongoing market reforms and the rapid growth of Asian local currency bond markets have led to an increase in foreign investors' participation in the Asian local currency bond space.
Apart from China – which saw foreign ownership of local currency government bonds more than double from 2.5% at end-2014 to 5.8% at end-20191 – other Asian countries saw truly exponential increases in foreign-ownership rates.
In Indonesia, for instance, the percentage increased from 2.7% at end-2004 to 38.6% at end-2019.1 Over the same period, Korea saw an increase from 0.4% to 12.3% and Thailand from 2.0% to 17.0%.1
In earlier years, shorter-term bonds dominated issuance. However, governments then ramped up their issuance of longer-dated bonds to meet rising needs of longer duration assets for investments in addition to larger benchmark sizes.
At the end of 2004, for example, government securities with maturities of over ten years comprised 5.2% of all issuance in the Philippines.1 By end-2019 it stood at 36.0%.1 In Korea, such long-dated bonds increased from just 0.4% of all issuance to 33.9% as at September 2019.1 Malaysia, Singapore and Thailand also recorded significant increases in their bond tenures.
From a liquidity perspective, there have also been substantial improvements. Trading volumes have risen across the board. China saw activity surge from USD 97.8 billion in Q4 2004 to USD 5.5 trillion in Q4 2019, while in Indonesia it increased almost ten-fold.1 And although the expansion in other economies was more modest, it was still apparent.
This was also reflected in the narrowing of bid-ask spreads. Admittedly, the difference was far starker in select markets – China's spreads narrowed from 32.5 basis points (bps) in 2004 to 1.1 bps in 2019, Indonesia's from 21.4 bps to 4.1 bps, and the Philippines' from 25.0 bps to 2.8 bps.1 Tightening was consistent across the entire Asian local currency bond landscape.
Asian bonds may still be a pupil in the broader emerging market (EM) asset class, but in many ways they have pulled ahead of many of their contemporaries and will eventually graduate from the EM school.
In our next article, we will look towards the future and make a case for why we believe that Asian local currency fixed income remains a valuable addition to a portfolio, even amid uncertainty around the global COVID-19 pandemic and geopolitical tensions.
2. Source: Bloomberg, Asian Development Bank, International Monetary Fund, World Economic Outlook Database, as of December 2019. Includes China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
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