Developing Asian Bond Market Set to Top Japan as Funds Go Global

  • Asia's emerging debt market reached $8.8 trillion: ADB
  • Philippines, Indonesia yield spreads widen versus Japan

Japanese pension funds and life insurers starved for yield at home can increasingly look next door for a bond market that’s on the verge of outgrowing their own.

Total outstanding debt in emerging Asian markets reached $8.8 trillion this year, with about a third of that in China, versus $9.2 trillion in Japan, according to the Asian Development Bank. Twenty-year government bonds, the maturity preferred by these investors, yield 1.02 percent in Japan, compared with 3.66 percent in China, about 5.5 percent in the Philippines and more than 9 percent in Indonesia. The ADB is seeking to open the markets and make them more appealing to global funds.

“Systems for things like procedures and disclosure are fragmented, which leads to high trading costs, so we’re continuing to work toward standardization,” Satoru Yamadera, the lender’s Manila-based Principal Financial Sector Specialist, said in an interview in Tokyo on Dec. 10. “The Japanese have not yet gotten serious about investing in Asia, but for global investors it’s not so much a question of whether to invest, but how to invest.”

Japan’s pension funds, which hold a combined 352.1 trillion yen ($2.9 trillion), face pressure to boost returns as they seek to meet payouts to the fastest aging population in the developed world. Domestic yields have been pushed to record lows as the Bank of Japan presses ahead with unprecedented quantitative easing, while the prospect of a gradual increase in U.S. interest rates keeps Treasury yields contained. The $1.1 trillion Government Pension Investment Fund this year created a mandate for emerging-market debt as part of a push into riskier assets.

Go Abroad

Japan’s big four life insurance companies indicated in October their intentions to increase overseas debt holdings this fiscal year ending March. Life insurers overall had a total of 365.8 trillion yen in assets as of the end of September, with foreign bonds making up 20.5 percent of that, a 1.3 percentage point increase over a year earlier.

“As the Asian market becomes more and more important for Japanese insurers, Dai-ichi Life will continue to seek opportunities,” Kazuyuki Shigemoto, a general manager in the global fixed income investment department of Dai-ichi Life Insurance Co., said at an ADB seminar on Nov. 26 in Tokyo. “Interest rates in developed market countries are so low right now.”

Haruhiko Kuroda, who was president of the ADB immediately before becoming head of the central bank in March 2013, is trying to persuade investors to buy riskier assets such as stocks and foreign securities as part of his attempt to free Japan from decades of deflation. He reiterated in a speech on Dec. 7 that his policies have had the “positive financial effects” of holding down bond yields, encouraging portfolio rebalancing, and boosting asset prices. Long-term JGBs offer the lowest yields globally after Switzerland.

Market Obstacles

At Dai-ichi Life, Asian bond holdings currently make up less than 10 percent of its $20 billion currency-unhedged fixed-income portfolio. Shigemoto cited complicated procedures, hedging difficulties and low credit ratings as among the barriers to increasing investment.

The cost to insure against a Japanese sovereign default is 51 basis points, near a three-week low, according to CMA data, compared with 244 basis points for Indonesia and 111 basis points in the Philippines. The benchmark CDS for China is 110 basis points, just short of the highest level in two months.

President Xi Jinping is pushing to broaden global use of the yuan, which just last month won entry into the International Monetary Fund’s basket of reserve currencies. In July, authorities made it easier for sovereign wealth funds and overseas central banks to trade in its interbank bond market. At $5.9 trillion, according to the ADB, the yuan bond market forms the bulk of emerging Asian debt.

Mizuho Bonds

Mizuho Bank Ltd. this year issued 250 million yuan ($39 million) of two-year notes with a 3.82 percent coupon, counting Dai-ichi Life among the investors. It also sold 3 billion baht ($83 million) of three-year securities carrying a 2.33 percent coupon, under the ADB’s ASEAN+3 Multi-Currency Bond Issuance Framework, or AMBIF.

“Although we were able to issue under the shared AMBIF format, the securities are governed by Thai law,” Kotaro Hayashi, who works at Mizuho’s International Business Division, said in an interview Friday. “It they were governed by British law, which is more common in the market, they would be easier to issue, and easier for investors to buy.”

While idiosyncrasies remain for now, the ADB’s Yamadera says there’s no doubting the increasing importance of Asia’s bond market. As a proportion of gross domestic product, Thailand ranks just behind Germany and the U.K. in size, while Malaysia and South Korea outstrip them both, according to the bank’s data.

“It’s a mistake to assume that because these are emerging economies, their bond markets must still be in their infancy,” he said. “They’re drawing increasing attention.”

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