Article 4.12 Asian credit markets expand at a record pace

By Chris Flood

Financial Times July 27, 2014

Asian credit markets are expanding at a record pace, attracting growing numbers of both international and local institutional investors.

David Bessey at Pramerica Fixed Income says the large scale of Asian corporate bond issuance has meant that the tightening in credit spreads has lagged behind developed markets, providing relative value opportunities for managers running global and multi-sector funds.

Raja Mukherji at Pimco, the world's largest bond house, adds that many US and global investors remain underinvested in Asia and want to add exposure.

‘Local investors, especially insurance companies, pension funds and sovereign wealth funds, are increasingly participating in new issues,' he says.

Rajeev De Mello at Schroders agrees. He has seen strong interest from US investors in investment-grade credit across Asia, with clients showing a stronger appetite for risk than in previous years.

Mr De Mello adds that Asian local-currency bonds provide a distinct yield advan­tage over US Treasuries, pointing out there is better value in those markets where interest rates have already increased, such as China, India and Indonesia.

But he cautions that some other Asian credit markets now look ‘frothy'. Indeed, yields are described as low in export-orientated Asian countries such as Taiwan, South Korea and Thailand, although there are selective pockets of value elsewhere for tactical investors.

Robert Stewart at JPMorgan Asset Management says: ‘Indonesia is attracting a lot of interest from global fixed income investors anticipating that Joko Widodo will pursue a reform agenda after his recent election as president.'

In India, Mr Bessey says Pramerica hopes that the new Modi government will pur­sue a more orthodox fiscal approach than its predecessors.

However, Indonesia and India play less influential roles in Asian credit markets than China. The Chinese corporate bond market is now the world's largest. Non- financial debt is expected to grow from around $14.2tn at the end of 2013 to $20tn over the next four years, according to Aberdeen Asset Management.

But Aberdeen warns that a third of Chinese debt is sourced from the informal shadow banking sector while signs of stress continue in the country's property markets.

But the sense is clients in Asia see China's credit markets as ‘an exciting area' as Beijing gradually liberalises capital flows. Mr Stewart says: ‘We are also starting to see interest from other (non-Asian) international investors in onshore Chinese corporate bonds, which look relatively attractive in the current low-yield environment.'

FT

Source: Flood, C. (2014) Asian credit markets expand at record pace, Financial Times,

27 July.

Bond indices

A bond index provides information, such as price movements and returns over a period for a particular category of bond, e.g. an average for 100 or so corpor­ate bonds denominated in euros or a few dozen inflation-linked bonds across the world. Among other uses they allow investors to compare their bond port­folio performance against a benchmark. The main indices are managed by Markit (the iBoxx indices) and FTSE. Leading investment banks supply bid and ask (offer) prices through the trading day to these organisations, which then compile the indices.

In Table 4.2, an example of the bond indices table from the Financial Times, the first column shows whether the bonds are denominated in sterling, dollars or euros, the second column shows the number of bonds included in the index.

Table 4.2 Bond indices in the Financial Times

BOND INDICES

Source: Data from www.ft.com http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=BR&Type=BOND&Date=07/08/2014