Risk averse investors of Asian local markets favor Korean bonds in flight to safety

Early 2021 saw global investors flocking to Asian local fixed income markets in search of more attractive yield and other diversification benefits. This trend has continued well into the second quarter, with foreigners’ purchases of Asian bonds surging to a two-year high in June. Yet by the end of the first-half, signs have begun to emerge of investors switching from the more volatile local markets to those with more stable outlook within the region.

Second-quarter data gathered from the MarketAxess platform offers a glimpse of this shift, with average daily trading volume in Malaysia Ringgit (MYR) dropping to 28.4% from the first quarter. By contrast, the volume of Korean Won (KRW), viewed generally as a relative safe haven in times of global volatility, nearly doubled in volume. These figures are consistent with the broader markets, as data from local regulatory authorities and bond market associations show similar fund-flow pattern. The Korea Financial Investment Association, for example, reported global investors bought more Korean bonds in the first seven months of this year than all of 2020, with foreign net purchase setting a monthly record in June.

There are a few explanations for bond investors’ increased caution. The obvious ones are the resurgence of COVID-19 cases in most of Southeast Asia and the concern over its impact on their economies and public finance. Malaysia shows outflow from Thailand and the Philippines, countries that have been hit hard by the delta variant surge and are falling behind in vaccination rates. Trading volume of Singapore Dollar (SGD), on the other hand, has been relatively stable. The nation-state has fully inoculated three quarters of its population.

Another factor that could be causing investors jitters is the increased uncertainties over a few sectors of the Chinese economy that are facing regulatory scrutiny, namely technology and real estate. An example is a new cybersecurity law taking effect in September that tightens rules on how data can be collected and shared with third parties and is generally viewed as being more wide-reaching than the EU’s GDPR. Since the second quarter stocks from these industries have been underperforming. While this is unlikely to damage the country’s long-term economic outlook, it nevertheless puts pressure on Chinese credits and raises concerns whether the selloff would spread to other sectors within the country.

As an innovator of fixed income trading technology, we have also observed some major behavioral changes among bond traders over the past few months. Most importantly, we have been encouraged by the way they embrace our solutions even during periods of abnormal volatility. In the past they tended to move away from electronic platforms and revert to voice trading once liquidity began to tighten. But thanks to our award-winning, all-to-all marketplace Open Trading®, we connect counterparties that would traditionally not face each other in an anonymous fashion. This simultaneously opens up additional channels of liquidity, provides cost savings in the form of tighter bid/ask spreads and limits information leakage as all parties face MarketAxess for settlement.

Other products that have experienced surging demand under the current market condition include our portfolio trading solutions, which allow traders to package up to 1,500 bonds into a single contingent package. In addition to simplifying workflow and lowering cost on large and complex deals, they also help to improve liquidity on thinly-traded bonds, an important feature to investors looking to de-risk their bond holdings.

Despite the latest increase in volatility and its impact on some local currency bonds, over all we remain positive on the long-term prospect of the Asian markets and the role electronic platforms can play in their development. Reports like those about Chinese authorities working on preparations for the launch of the Bond Connect Southbound link program are reasons behind our optimism.