What 2023 taught us about the APAC bond markets
By Riad Chowdhury, Head of Asia-Pacific | 5 February 2024
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As we navigate the early days of 2024, it's helpful to take stock of the year gone by—a year that was replete with global events and policy decisions that have left an indelible mark on the Asia-Pacific bond markets. Let’s delve into the economic undercurrents of 2023 and cast an eye towards what we might expect in the year ahead.
The macro drivers of 2023 and their legacy
Last year was a testament to the unpredictability of the forces that drive macroeconomics. The Federal Reserve's policy rates were a constant source of speculation, with the consensus being that a turn might occur before mid-2024. Yet, as history has shown, the market forecasts have often missed the mark.
Europe grappled with inflation more severely than the US, hinting that the European Central Bank may not mirror the Fed's actions in the coming year. The divergence in monetary policies across the globe was stark, with Western economies tightening their belts while Eastern counterparts remained more accommodative.
Asia-Pacific at a crossroads
The Bank of Japan's yield curve control was a focal point, with the market often misjudging the pace of change—a reminder of Japan's methodical approach to policy shifts. China faced its own set of growth challenges, particularly in its property sector, which signaled a continuation of accommodative policy stances.
The Chinese bond market witnessed contrasting forces at play in 2023. The onshore bond yields stayed low, which could be attributed to the overarching policy measures aimed at economic stabilization. In the offshore USD market, after a year of adjustments, there were few early signs of stability and a reduction in defaults, with growing attention in the Local Government Financing Vehicles—a segment worth watching due to its varied credit quality.
MarketAxess’ 2023 data reflects these broader trends within APAC’s fixed income markets. Our platform saw resilient growth against a challenging backdrop, with Average Daily Volume (ADV) increasing 17% over 2022 in the APAC region, a sign that electronic trading is increasingly taking hold in these markets. This growth was particularly notable in Asia Local Markets, which represented 33% of our global Local Markets volume. Following a more challenging trading environment for our APAC clients in the first half of the year, we observed a strong recovery in the second half, with monthly year-on-year volume growth rates ranging from +18% in June to an impressive +65% in December.
Disproportionate flows and performance divergence in Asia
The narrative for Asia's credit markets in 2023 was complex. Despite a promising start, fueled by hopes of a Fed pivot and China's post-COVID recovery, reality soon set in. The Fed's additional rate hikes sent treasury yields soaring, dampening the initial optimism.
Asia's Investment Grade spreads managed to tighten due to strong demand and limited supply, outperforming some of their Emerging Market (EM) and Developed Market counterparts. However, Asia's High Yield (HY) sector suffered, primarily due to the downturn in China's property sector.
The J.P. Morgan Asia Credit Index (JACI) offered modest total returns, but this paled in comparison to risk-free investments like US treasuries. This naturally sparked a debate on the relative attractiveness of treasuries versus credit investments.
Asia EM local currency bonds saw net selling on our platform, except for Korea—a trend mirrored by public data showing that inflows into Asia EM local currency bonds were well below their annual average seen from 2018-2021
How firms automated their edge in 2023
Automation in fixed income trading came to the fore in 2023. Our platform saw a significant growth in global trading activity using Auto-X™ RFQ, our tool for automated, lower touch liquidity acquisition, with trade volume seeing a 38% year-on-year growth in 2023. By the end of 2023, 44% of Auto-X RFQ trades globally were actually “no-touch” trades–reflecting a broader industry move toward leveraging technology for competitive advantage.
On the other side of the trade, trade volume using Auto-X Responder, our tool for automated liquidity provision, also doubled in 2023 from the previous year.
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“Automated trading works best in these situations. We make a list. We select dealers. We send it out and get the trades done. Given the size and number of lines we have, automating trades give us great efficiencies.” Khashayar Surti, APAC Head of Trading, UBS Asset Management |
This growth in automated trading activity underscores the evolving needs of traders for more dynamic trading tools and indicates a shift towards not just a broader acceptance of automated e-trading, but a growing preference for more efficient trading processes.
As automation adoption increases, the need for more accurate and actionable data increases as well. Our machine-learning price engine, CP+™, and our EMEA & APAC intraday trading tape, Axess All®, continue to play a key role in our APAC clients’ trading workflow.
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“Data is no longer ‘nice-to-have’ but an essential part of today’s market. The APAC region has long lacked the tools it needs to address the opaqueness of its fixed income markets – but it doesn’t have to stay that way.” Rohan Ahlawat, Data Sales Relationship Manager, MarketAxess |
What’s next for APAC fixed income markets?
As we turn our gaze to 2024, it is expected that the trends observed in the previous year will extend their influence into the new year. It will be interesting to see if the policy divergence between Eastern and Western central banks persists as a defining feature of the global financial landscape, and consequently, bond yields.
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The rebalancing act
In 2023, we witnessed a rebalancing in Asia credit exposure away from China towards more investment grade sectors in Japan, Australia, and Korea—a trend likely to continue into 2024. These markets are becoming increasingly significant within APAC credit, offering more issuance and less volatility—attributes that are highly sought after by investors. -
India's emergence
India's inclusion in the GBI-EM index is significant, poised to reach 10% weighting (highest possible for any country) and become an integral part of global EM Local Markets (LM) portfolios. With its high yield appeal, India may well outperform most global LM markets in terms of inflows and performance in 2024. -
A fresh start for Asia Credit markets
For Asia Credit, we enter 2024 with compressed credit spreads but pockets of yield opportunities. The region starts from a 'cleaner' slate after enduring a couple of tough years. With China's property sector now less dominant within major indices, its influence on overall performance is reduced, paving the way for other markets to contribute more significantly. Demand from investors outside APAC, particularly from the US and Europe, is on the rise for our markets. This diversification of investor base is essential for the robustness of APAC bond markets going forward. -
Automation and data will drive trading strategies
The growth in automated trading is expected to follow suit in Asia as the region’s markets become increasingly sophisticated and participants seek to leverage technology and data to enhance operational efficiencies and decision-making. The rise in lower-touch trading is likely to resonate with APAC market participants who are looking to streamline their workflows and reduce manual intervention, especially in a region where markets can be fragmented. Market participants are also seeking higher levels of granularity in data to address their need for better market color around pockets of liquidity.
The vision for 2024
The APAC bond markets are poised for a dynamic 2024 with a mix of caution and optimism. The markets are evolving, and with our data and insights, clients can navigate this landscape more confidently and effectively.
As we continue to observe and analyze market trends, we are committed to enhancing our products and developing new, innovative solutions to build on the resilience and adaptability of the APAC bond markets. Join us on this journey as we shape the APAC bond markets of 2024 and beyond.
Want to know how we are transforming the APAC bond markets? Find out more