Asia Aging Shields Bonds From Global Rout as Deflation in FocusLilian Karunungan
The global bond rout is sparing Asia’s more developed economies as central banks fight deflation risks and pension savings swell among rapidly aging populations.
While euro-zone and U.S. sovereign debt lost 3.6 percent and 2 percent, respectively, in the past month, similar notes in China and Taiwan returned 1.1 percent and 0.3 percent, indexes compiled by Bloomberg show. Markets are benefiting as policy makers in East Asia keep borrowing costs low amid the prospect of Federal Reserve rate increases. The United Nations forecasts people over 60 will almost triple in the region by 2050.
“The richer economies in East Asia have an older population,” said Thiam Hee Ng, senior economist at the Asian Development Bank in Manila. “They tend to have large savings and a preference for fixed income, which increases demand for bonds. As savings are higher than investment, yields would tend to be lower.”
While Japan had the highest portion of people aged over 65 in Asia at 25.8 percent, its neighbors are catching up, U.S. Census Bureau estimates show. South Korea’s percentage was 12.7 percent, Taiwan’s was 11.8 percent, Thailand’s was 10.1 percent, while China’s is just under 10 percent.
Asian economies built on manufacturing have been slow to adjust to the double whammy of cooling global demand after the 2008 financial crisis and a shrinking pool of youthful consumers at home. Both Thailand and Taiwan are having their worst bout of deflation since 2009. Korea’s inflation has eased to the slowest in almost 16 years and producer prices have fallen for nine months. China’s consumer-price gains have cooled this year to the slowest pace since 2009.
“Even when the Fed starts hiking, the central banks which are facing these deflationary pressures will still be willing to ease,” said Chua Hak Bin, an economist at bank of America Merrill Lynch in Singapore. “If you’re a bond investor and you’re hedged on the currency, then you would be benefiting.”
Structural factors such as rapid aging have changed the way monetary policy affects the economy, Bank of Korea Governor Lee Ju Yeol said in a letter to employees on April 1. Taiwan’s central bank Governor Perng Fai-nan told lawmakers on March 12 the island doesn’t have to follow U.S. monetary policy.
A graying society curbs inflation as less money is spent on housing, cars and clothing and more is saved in funds that buy fixed-income securities. Gross national savings were 51 percent of gross domestic product in China and 35 percent in South Korea in 2013, according to a World Bank report. That compares with 17 percent in the U.S. and 26 percent in Germany.
Outside of Japan, South Korea has the “worst demographics” for those seeking high yields, said David Munro, chief executive officer of Singapore-based Volatility Research & Trading Ltd., which advises hedge funds on demographics. The number of babies born in South Korea has dropped to about 400,000 per year from over one million in 1971, he said.
“If the Fed raises rates then international investors who seek high yields may go back to the U.S.,” Munro said. “But I think domestic bond investors in Asian markets will stay since they require security and don’t want to deal with currency and foreign credit risk.”
Even after multiple interest-rate cuts, returns on bonds in Asia are still relatively attractive. Corporate dollar bonds in South Korea and Taiwan yield at least one percentage point more than U.S. Treasuries, according to JPMorgan Chase & Co indexes. Won sovereign debt yields 0.8 percentage point more.
Inflation-adjusted policy rates in Thailand and Taiwan are near the highest levels since since 2009 at 2.54 percent and
2.68 percent, respectively. South Korea’s is near a one-year high. Korea lowered its rate three times since August, Thailand cut twice this year and China three times since November.
AT&T Inc. and Morgan Stanley are among borrowers who raised $39.8 billion selling notes in Taiwan in the past year, Kia Motors Corp. plans its first South Korean won bonds in four years and Apple Inc. is exploring a maiden yen issuance.
Bond investors often hedge to protect against volatile Asian currencies. Thailand’s baht fell 3.1 percent in the past month and the Japanese yen weakened 0.9 percent.
“Disinflationary trends mean Asian central banks will be keen to keep cash rates low,” said Isaac Poole, head of capital markets research for Asia Pacific in Hong Kong at Towers Watson & Co. “They don’t need to immediately follow the Fed with rate hikes but they do have scope to hike if currencies messily depreciate.”
China pension fund assets surged to $99 billion in 2013 from $6 billion in 2004, Organization for Economic Cooperation and Development data show. South Korea’s reached $82 billion, Thailand’s $23 billion and Japan’s $1.33 trillion.
“The level of people that are retiring need to invest in low-risk assets,” said Amanda Stitt, a London-based investment director at Legg Mason Global Asset Management, part of a group with $707 billion under management as of April 30. “There’s a bid for long-end bonds because of the demographics” in countries like South Korea, she said.
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