Investor appetite for Asia local markets bonds sets to grow in 2022 amid yield and stable outlook

The story for emerging Asia local market debt in 2021 was one of ups and downs. After a brief hiatus in 2020, yield-hunting investors poured into the region for most of the first half as concern about the COVID-19 pandemic subsided. Yet towards the end of the second quarter, such optimism gave way to renewed uncertainties over a resurgence of cases and their potential impact on regional governments’ fiscal and monetary policies. To add to the gloom, since July the Chinese credit market has been rocked by the debt crisis at one of the nation’s largest developers, leading to investor worry that it may spill over to the rest of the property market or even drag down the entire economy.

Despite the bumpy ride, on the whole Asia local currency bonds recorded a solid growth year in trading volume in 2021. Data gathered by the MarketAxess platform shows that those markets with more stable economic outlook and fiscal positions have remained attractive to global investors. Korean Won (KRW) was the top gainer among all Asian local currencies on our platform with a 254% jump in volume for the full year. Singapore Dollars (SGD), another relatively stable currency, has overtaken Thai Bhat (THB) as the third-biggest Asian local market with an 86% YoY increase. Malaysia Ringgits (MYR) remained our biggest market, having expanded 36%. Thailand was the laggard with a comparatively modest 5.7% gain, as the reliance on international tourism made its economy more susceptible to pandemic-related travel restrictions and social distancing rules.

Looking ahead at 2022, we expect trading activities of Asian local currency bonds will gradually shift back to their pre-pandemic patterns. Our data from Q4 of 2021 seems to support this view - other than Thailand, all our major Asian emerging markets posted at least 20% YoY growth, shrugging off concerns over the Omicron variant. Preliminary numbers gathered from the first few weeks of this year also resembled those of a typical January, which is often characterized by a flurry of activities as traders return to work from the holiday season. On the other hand, what is likely to dominate the agenda of emerging Asian market investors this year is the increasing expectation of aggressive policy tightening by the U.S Federal Reserve, and how that may weaken the prospect of local currencies and strain regional governments’ ability to borrow.

Looking at the Renminbi (RMB), reports in January suggested that the People’s Bank of China has been stepping up effort to avert a messy collapse of Evergrande, the once mighty Chinese developer which has been on life support for months. The central bank in mid-January trimmed its key lending rate for the second time in a month after the Chinese government announced weak fourth-quarter economic data. With the prospect of a prolonged period of monetary easing, RMB bonds will likely remain attractive to foreign fund flows, especially as the U.S. Fed takes the opposite path. In fact, aside from a slight dip in March, foreign holdings of domestic Chinese bonds have expanded in every month of 2021, reaching 4 trillion RMB (US$632 billion) in December, according to Bond Connect data.

As we wrote in this same blog series last year, global investors are now considering exposure to Asian bonds to be crucial, because of their relatively attractive yields and also the region’s more stable economic outlook compared to other emerging markets. As an innovator in trading technology, we will continue to invest in new solutions to help Asia attract greater global fixed income investor participation. Our launch last year of Bond Connect and CIBM Direct to access China’s onshore debt market was a major step for us towards building an even more comprehensive local markets’ product offering for our users – we now cover 28 local markets globally and there’s more to come. Stay tuned.
 

Please note that this article was written before the events that are currently unfolding in Ukraine. The author notes that these events will certainly play a significant part in the shape of EM markets through 2022, including Asia local markets. We would expect to update our outlook accordingly early in the second quarter.