Affluent Asians Buy Dollar Bonds Abandoned by Risk-Averse Funds

  • Asia investors took up 95% of Swire Properties sale this month
  • Yield premium on Asian corporates declines below U.S. peers

Asian investors fleeing weakening currencies are filling a gap left in the regional dollar bond market by risk-averse foreign funds.

That’s helping to keep a lid on borrowing costs for Asia’s investment-grade firms, which are paying lower premiums for international notes than their U.S. peers for the first time in nearly seven years, according to Bank of America Merrill Lynch indexes. Issuance of bonds that can only be marketed outside the U.S. rose to 52 percent of last year’s $161 billion sales in Asia from 21.4 percent in 2010, data compiled by Bloomberg show.

“Demand for Asian credit is supported mostly by the sheer growth of the local investor base,” said Sergey Dergachev, a senior money manager who helps oversee about $13 billion at Union Investment Privatfonds GmbH in Frankfurt. “You have Chinese banks, asset managers, life insurers, private banks who are all flushed with cash and provide a strong bid for upcoming names."

Turbulence in global markets has made familiar local borrowers all the more appealing to Asian creditors. Chinese and other regional investors also have a growing appetite for dollar notes after the yuan devaluation in August triggered currency drops across the region and the Federal Reserve increased interest rates in December. Demand for the securities is getting a further boost as aging populations prepare for retirement, according to Western Asset Management Co.

Greater Share

Funds from Asia bought 88 percent of Korea Development Bank’s $1 billion 10-year bonds sold earlier in January, up from 73 percent of its $750 million 10-year notes issued in September. Asian buyers took 95 percent of a $500 million offering from Hong Kong’s Swire Properties Ltd. this month and 96 percent of Bank of Communications Co.’s $500 million note sale.

Since the third quarter of 2015, a considerable amount of Chinese money has left the country to purchase dollar notes, according to JPMorgan Chase & Co. The nation’s foreign currency reserves declined by $108 billion in December alone, an indication of capital outflows.

“It’s a currency view onshore investors take -- investors want to invest in U.S. dollar assets,” said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong. “They would buy the names they know and they trust their own state-owned enterprises.”

Bonds from investment-grade firms in Asia outperformed U.S. peers in the past year, returning 1.6 percent compared with a loss of 2.9 percent, Bank of America Merrill Lynch indexes show. The spread on Asian dollar non-speculative debentures over Treasuries fell below that of U.S. equivalents on Jan. 20 for the first time since 2009, and remained two basis points lower as of Thursday.

Yield spread between Asian IG premium and US IG premium (in basis points)

Source: Bank of America Merrill Lynch

"We are seeing this rare scenario again this year because of the local bids,” said Ken Hu, the chief investment officer for Asia-Pacific fixed income at Invesco Ltd., which manages about $776 billion. “Korean and Chinese are buying bonds from their own countries."

South Korea estimates the portion of its population aged 65 and above will climb from 13 percent to 40 percent by 2060, increasing the pool of pension assets and curbing the economy’s potential pace of growth. Japan and China are also suffering as aging populations lead to lower inflation and falling local benchmark interest rates.

Overseas bond investment by yield-hungry Korean institutional investors is growing at a 38 percent pace, Bank of Korea data show. Mirae Asset Global Investments Co. this month opened a fund for developing nation U.S. currency corporate debt with target returns of about 5 percent.

While global investors may see Asian credits as risky bets when the U.S. Federal Reserve is raising rates, the demand from regional investors is likely to stay strong, according to Schroder Investment Management Ltd.

“Asian banks have seen an increase in dollar deposits and are comfortable investing in regional credits,” Rajeev De Mello, head of Asian fixed income in Singapore at Schroder Investment Management Ltd. with assets of about $446.5 billion under management. “The trend to accumulate dollars will continue as there is still a view that the dollar will strengthen due to the Fed and to Asian central banks being more biased to cut their own rates.”

Yield spread between emerging market bond premium and Asian bond premium (in basis points)

Source: Bank of America Merrill Lynch Index

Chinese banks are buying top-quality dollar notes, while funds with quotas to invest overseas are purchasing high-yield debentures, Ben of JPMorgan said. Asian junk dollar bonds returned 4.6 percent in 2015 compared with 3.2 percent for all emerging-market junk debt, according to Bank of America Merrill Lynch indexes. Agile Property Holdings Ltd.’s 8.375 percent notes due 2019 had a total return of 16.6 percent in the past 12 months.

“We see strong demand from Chinese high-net-worth individuals and institutions for dollar bonds," said Desmond Soon, Singapore-based head of investment management in Asia outside of Japan at Western Asset Management, which manages about $450 billion. “I’m more comfortable with investment-grade bonds given that demand. In the high-yield space, particularly the property sector, we do see Chinese picking up bonds. But we need to be cautious about low trading volumes."

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