Analysts say that supply of bonds in Asia will hit a record high of US$150 billion this year. This is despite their poor performance and concerns about the strength of the global economy.
Morgan Stanley also believes that the size of the Asian bond market will reach US$1 trillion by the end of 2017: a prediction that would require an increase of US$150 billion worth of annual supply on average, said the investment bank.
“Borrowers have managed to tap into a new demand base, both by geography and type. Of note is the growing allocation to U.S. funds, both investment grade, and emerging market dedicated, has been as high as one-third this year versus one-fifth the past two years, replacing Asia based demand.” said Viktor Hjort, a credit analyst at Morgan Stanley.
However, the heavy increase in supply has also caused bonds to under-perform in the secondary markets. An example are China Cinda Asset Management‘s (HK: 1359) debut bonds which performed poorly in secondary markets soon after they were priced with their 5-year tranche widening by 5 basis points and their 10-year offering staying near par value.
Life Insurance Firms Drive Demand for Bonds in Asia
Not only has the desire for bonds in Asia has become overwhelming abroad, but the types of investors are changing as well. Specifically, while private banks have decreased their holdings to only 10% of total demand, life-insurance providers now account for 13% of demand.
“What makes lifers natural investors in the asset class is their size, their asset growth and, with the exception of the Taiwanese, their current under-allocation to offshore fixed income.” Hjort said.
Life insurance companies in China are considered among the best potential sources of demand because of a recent loosening of government regulations that now permit businesses to allocate up to 15% of their total assets to investments abroad. In addition to a deregulation of how much insurers sell their policies for, banks believe that competition will increase for insurers throughout the country.
With debt on the rise in most Asian countries, it’s best for personal investors to not buy bonds in Asia.