HONG KONG •Asian investors fleeing weakening currencies are filling a gap left in the regional US dollar bond market by risk-averse foreign funds.
That is helping to keep a lid on borrowing costs for Asia's investment-grade firms, which are paying lower premiums for international notes than their United States peers for the first time in nearly seven years, according to Bank of America Merrill Lynch indexes.
Issuance of bonds that can be marketed only outside the US rose to 52 per cent of last year's US$161 billion (S$229 billion) sales in Asia, from 21.4 per cent in 2010, data compiled by Bloomberg shows.
"Demand for Asian credit is supported mostly by the sheer growth of the local investor base," said senior money manager Sergey Dergachev, who helps oversee about US$13 billion at Union Investment Privatfonds in Frankfurt.
"You have Chinese banks, asset managers, life insurers, private banks which are all flush with cash and provide a strong bid for upcoming names."
Turbulence in global markets has made familiar local borrowers all the more appealing to Asian creditors. Chinese and other regional investors also have a growing appetite for US dollar notes after the yuan devaluation in August triggered currency drops across the region, and the US Federal Reserve increased interest rates last month.
Demand for the securities is getting a further boost as ageing populations prepare for retirement, according to Western Asset Management.
Funds from Asia bought 88 per cent of Korea Development Bank's US$1 billion 10-year bonds sold earlier this month, up from 73 per cent of its US$750 million 10-year notes issued in September.
Asian buyers took 95 per cent of a US$500 million offering from Hong Kong's Swire Properties this month and 96 per cent of Bank of Communications' US$500 million note sale.
Since the third quarter of last year, a considerable amount of Chinese money has left the country to purchase US dollar notes, according to JPMorgan Chase.
The nation's foreign currency reserves declined by US$108 billion last month alone, an indication of capital outflows.
Said Mr Ben Sy, head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong: "It's a currency view onshore investors take - investors want to invest in US dollar assets. They would buy the names they know and they trust their own state-owned enterprises."
Bonds from investment-grade firms in Asia outperformed their US peers in the past year, returning 1.6 per cent compared with a loss of 2.9 per cent, Bank of America Merrill Lynch indexes show.
While global investors may see Asian credits as risky bets when the Federal Reserve is raising rates, the demand from regional investors is likely to stay strong, according to Schroder Investment Management.
Said Mr Rajeev De Mello, head of Asian fixed income in Singapore at Schroder Investment Management with assets of about US$446.5 billion under management: "Asian banks have seen an increase in dollar deposits and are comfortable investing in regional credits.
"The trend to accumulate dollars will continue as there is still a view that the dollar will strengthen due to the Fed and to Asian central banks being more biased to cut their own rates."