Global Central Banks Help Send Asian Bond Costs to Decade Low

  • Dollar note premiums drop to pre-global financial crisis level
  • Research shows yields may stay low for time: Western Asset

Asian firms are getting a little help from global central banks, as borrowing costs in the region’s bond market slide to the lowest levels since before the global financial crisis.

The extra yield over Treasuries that investors demand to hold U.S. currency notes from the region’s issuers slid 21 basis points in August to 204, the lowest since 2007, according to a Bank of America Merrill Lynch index. Clues to where the financing costs go from here may be found in minutes from the Federal Reserve’s July meeting scheduled for release later Wednesday.

Asia-Pacific borrowers outside Japan boosted dollar bond sales 55 percent this quarter, as investors facing negative rates in Japan and Europe lap up the notes, which had an average 3.77 percent coupon. The Fed next meets Sept. 20-21, after the Bank of England cut rates on Aug. 4. While two regional Fed chiefs indicated borrowing costs could be boosted at least once this year, data Tuesday showed U.S. consumer prices were little changed in July, reducing the urgency to tighten policy.

“There’s a lot of work and research that’s done to suggest these very low levels of interest rates and subsequently very low levels of corporate bond yields will probably stay for some time,” said Desmond Soon, head of investment management in Asia outside Japan at Western Asset Management Co. “We just saw the Bank of England reverse direction and cut rates and resume their qualitative easing program. Even the Fed is probably very dovish.”

The yield on Asian dollar securities has dropped 28 basis points this quarter to 3.34 percent, and touched a record low 3.33 percent Monday, the Bank of America index shows. That has been driven in part by surging demand from Chinese investors fleeing slumping onshore yields and a weakening yuan.

“Asian U.S. dollar bonds are supported by negative yields in Europe and Japan and the declining yields in the Chinese renminbi bond market,” said Ken Hu, chief investment officer of Asia-Pacific fixed income at Invesco Hong Kong Ltd.

— With assistance by Judy Chen, and David Yong

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