Domestic bond markets are booming across Asia ex-Japan, according to a study by research and consulting firm Greenwich Associates. The company says this is because private banks, asset managers, hedge funds and other investors, empowered by the spread of wealth across the region, are injecting unprecedented levels of liquidity into local markets.
The results of Greenwich Associates’ 2007 Asian Fixed Income Investors Study reveal that, excluding the business of central banks, products denominated in local currencies accounted for half of all fixed-income trading volume across Asia for the first time last year. Greenwich notes an increase in local currency product to 53% of total Asian trading volumes in 2007 from 30% in 2006.
“There has been an explosion in the growth of domestic currency Asian bonds,” says Tim Sangston, a consultant at Greenwich Associates. “Countries and companies that once had to issue bonds in dollars or European currencies can now tap newly liquid domestic capital markets in their local currencies.”
China, Australia/New Zealand, Indonesia, Malaysia, India, and Thailand are leading the growth. According to the study, each of these countries saw domestic-currency trading volumes increase at least 135% from 2006 to 2007.
The study found that hedge funds and private banks are playing a growing role in Asia. In another sign of the maturation of the Asian fixed-income market, the study revealed that the percentage of institutional investors in the region trading fixed-income products electronically grew to 47% in 2007 from 17% in 2006. The percentage of institutions that said they are considering trading products electronically more than doubled, growing to 15% from 7% in 2006.
In a separate study, Greenwich found that the Japanese bond market has also experienced strong growth. The company’s 2007 Japanese Fixed Income Investors Study found that domestic fixed-income trading volume in the country increased by 15% from 2006 to 2007 after remaining flat from 2005 to 2006 and growing 65% from 2004 to 2005. However, unlike the rest of Asia, the study revealed that Japan did this without much help from hedge fund or electronic trade execution.
Among the nearly 500 institutional investors participating in the study, total trading volume in Japanese bonds topped ¥313 trillion over the 12-month period ending in July, while fixed-income assets under management among yen investors also grew almost 15% to ¥316 trillion.
Japanese fixed-income markets were not hit as hard as bond markets in other countries by the credit crunch caused by the collapse of the US sub-prime mortgage market. This is because Japan’s domestic bond market is still heavily focused on government bond trading. Japanese government bonds accounted for 85% of total domestic market trading volume in 2007 – unchanged from the 2006 level.
As such, most of the growth in the market as a whole last year came from increases in Japanese government bond trading volumes – a trend that Greenwich believes is likely to hold, and could even intensify in coming months. Investors also reported an increase in asset-backed securities volumes of more than 70%, and a 17% growth in the volume of mortgage-backed securities.
“The appreciation of the yen against the U.S. dollar has already led to large purchases of JGBs by foreign investors, and we see nothing on the near-term horizon to interrupt that trend,” says Sangston.