Asian local currency bonds trading electronically more than ever in H1, even as more turbulence expected
Asian fixed income markets in the first half faced the twin threats of accelerating inflation and slowing economic growth. Several media reported global investors have reduced their bond holdings in emerging markets as yields rise in the U.S and other developed countries, whose central banks have taken more hawkish stances on interest rates.
Our conversations with clients in the region paint a similar picture. Amid rising risk aversion, many investors and dealers are hunkered down for a potentially long stretch of slower trading activities across several asset classes, including Asian fixed income. Global investors have also largely been shunning Renminbi bonds, as the government’s attempt to boost the economy through monetary loosening has kept yields low, in addition to the CNY currency being under pressure this year. The Chinese onshore government bond market in June recorded a fifth consecutive month of foreign outflow, according to a report by the Institute of International Finance.
Despite the broader market turmoil, data gathered by MarketAxess shows trading in Asian local currency bonds on our platform have grown in the first half. Overall, we recorded total volume growth of 63% over the same period in 2021, and 57% from the previous six months. Korean Won (KRW) denominated bonds once again led the gains after posting nearly 100% QoQ growth in both the first and second quarters and is now our biggest Asian local currency market. It has expanded for eight consecutive quarters, and our team expects KRW to continue to show strong growth given the broad global investor base and the depth of liquidity on our platform. Both Singapore Dollar (SGD), a stable performer for most of 2021, and Thai Bhat (THB), also recorded double-digit first-half growth despite paring back a bit in the second quarter. Malaysian Ringgits (MYR) retained its spot as our second-biggest Asian local market after posting a stable half.
But with major central banks poised for more aggressive rate hikes to tackle rising inflation, and the U.S. dollar continuing to strengthen, the outlook for Asia local currency bond markets is becoming more uncertain. In fact, the increased trading activity of KRW and SGD among other emerging fixed income markets suggest investors may be favoring markets with relatively stable economic outlook and fiscal positions in a flight to quality. This is further underscored by reports earlier this month that China is taking fresh steps to attract foreign investment in its bond markets, including reducing the Bond Connect service fee, improving overseas access to foreign exchange hedging, and streamlining the process of opening accounts.
Over this period of market uncertainty in Asia, we continue to grow our business in the region by bringing additional channels of liquidity to our clients. Other than Open Trading, our industry-leading all-to-all marketplace that allows dealers and investors to trade with one another anonymously, we have also added depth of our dealer panel for the Korean market. With a liquidity pool consisting of seven active dealers and the recent addition of three more local onshore dealers, it has been instrumental in the robust and consistent growth of KRW on our platform over the past two years.
As the leading trading technology provider, it is also important that we continue to innovate and deliver workflow efficiency solutions to our clients. This year saw the first Asian Portfolio Trading deal being completed on the MarketAxess platform. While the electronification of Portfolio Trading is already well underway in Europe and the U.S., its adoption has only begun recently in Asia. Portfolio Trading refers to a transaction where potentially hundreds of bonds can be traded as a single transaction with one of multiple counterparties - as the transaction is done in an all-or-none manner, multiple dealers can compete to price the entire portfolio. More recently, in April we introduced to Asia our Mid-X solution for Emerging Markets, a protocol that provides an anonymous matching session at the mid-point price. Going forward, we will continue to invest in innovative products and solutions to improve fixed income market structure in the Asia-Pacific region.
What this means for traders is the availability of more tools to find better liquidity, resulting in potentially greater cost-savings. In a fiercely competitive landscape, this is something Portfolio Managers are increasingly taking notice of as any transaction cost savings benefit the performance of their funds. Stay tuned.