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. This prediction requires 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. Growing allocation to U.S. funds, both investment grade and emerging market dedicated, are notable”, said Viktor Hjort, credit analyst at Morgan Stanley.
However, the heavy increase in supply 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.
Their 5-year tranche widened by 5 basis points while their 10-year offering stayed near par value.
Life Insurance Firms Drive Demand for Bonds in Asia
The desire for bonds in Asia has become overwhelming abroad, but the types of investors are changing as well. Specifically, private banks decreased their holdings to only 10% of total demand. Life-insurance providers now account for 13% of demand though.
“What makes lifers natural investors in the asset class is their size, their asset growth and their current under-allocation to offshore fixed income.” Hjort said.
Life insurance companies in China are among the best potential sources of demand because of government regulations being loosened. Insurance businesses can now allocate up to 15% of their total assets to investments abroad.
Banks believe that competition will increase for insurers throughout the country. They also anticipate further deregulation of the insurance industry.
With all of that said, debt is on the rise in most Asian countries. We believe personal investors should not buy bonds in Asia. Buying real estate with high rental yields is a much better alternative for those seeking passive income.