Emerging Asian local markets slowdown halted in Q3 amid signs of recovery
Asian local fixed income markets in the third quarter halted a brief slowdown that had begun towards the end of the first-half, as concerns eased over US inflation and early withdrawal of pandemic-related support policies, prompting investors to return to the region.
Data gathered by our platform shows a nearly across-the-region rebound in local currency trading activities from the previous quarter. Malaysian Ringgit (MYR), our second-largest Asian local currency market, led the recovery with a 11.4% increase in volume compared with the second quarter. It was followed by Korean Won (KRW) and Singapore Dollars (SGD), which rose 11.2% and 9.2% respectively. The reversal is particularly remarkable, given MYR and SGD had both lost more than 30% in the second quarter.
The rally came as both inflationary worries and concerns about earlier-than-expected Fed tapering eased. A speech by Fed Chairman Jerome Powell in August reassured the market there would unlikely be any surprise in its schedule to pare back asset purchases, while the weak US job number and lower-than-expected inflationary print in September further supported this view. Nevertheless, the pace of recovery for Asian emerging market debt still faced plenty of headwind, given the spot depreciation of the region’s currencies relative to the US dollar.
Philippine Peso (PHP) and Thai Bhat (THB), the two currencies whose exchange rates have been lagging compared to their Asian peers this year, posted more moderate growth in trading activities, advancing 5.1% and 2.9% respectively. Both countries have been roiled by economic and political uncertainties. The Philippine economy is still plagued by a high COVID-19 case load and high inflation, which limited its abilities to cut interest rates. Thailand is struggling to boost its tourism industry as travellers remain cautious, while the government in September raised its public debt ceiling to fund fiscal deficit.
The swift return by global funds to the region supports our view that long term demand for Asian emerging local market bonds will continue to grow. For the year-to-date, total trading volume for Asia on our platform is still up 60% year-on-year, while the number of active participants trading emerging market debt in the region has grown to more than 160 during the third quarter, surpassing the previous record. In fact, our conversations with many clients confirm that global investors now consider exposure to Asian bonds to be crucial, as they offer relatively attractive yields over similarly-rated bonds in developed markets.
As we remain confident that Asian debt will continue to attract interest from global investors, as an innovator, we have also been constantly investing in technological upgrades and delivering breakthrough products to our users. In November, we announced the addition of Hong Kong Dollar (HKD), along with two other currencies, to our global local market offering, meaning that clients can now trade emerging markets debt denominated in 28 currencies on our platform.
The November announcement also came just a few weeks after we launched a new, simpler trading channel that gives users access to China’s $17.5-trillion onshore debt market through the Bond Connect and CIBM Direct schemes. In a recent interview with the AsianInvestor publication, we noted the inclusion of the world’s second-largest bond market on our platform was a transformational development that will accelerate the velocity of trading into Asia. As we continue to expand in the region, we will remain focused on helping Asia’s bond markets to innovate, improve workflow efficiency and attract greater global client participation while bringing more liquidity and cost-savings to our users.