Affluent Asians buying dollar bonds abandoned by risk-averse foreign funds

Shoppers on Queen's Road in Hong Kong.
Shoppers on Queen's Road in Hong Kong. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Asian investors fleeing weakening currencies are filling a gap left in the regional dollar bond market by risk-averse foreign funds.

That's helping to keep a lid on borrowing costs for Asia's investment-grade firms, which are paying lower premiums for international notes than their US peers for the first time in nearly seven years, according to Bank of America Merrill Lynch indexes.

Issuance of bonds that can only be marketed outside the US rose to 52 per cent of last year's US$161 billion sales in Asia from 21.4 per cent in 2010, data compiled by Bloomberg show.

"Demand for Asian credit is supported mostly by the sheer growth of the local investor base," said Sergey Dergachev, a senior money manager who helps oversee about US$13 billion at Union Investment Privatfonds GmbH in Frankfurt. "You have Chinese banks, asset managers, life insurers, private banks who are all flushed 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 dollar notes after the yuan devaluation in August triggered currency drops across the region and the Federal Reserve increased interest rates in December. Demand for the securities is getting a further boost as aging populations prepare for retirement, according to Western Asset Management Co.

Funds from Asia bought 88 per cent of Korea Development Bank's US$1 billion 10-year bonds sold earlier in January, 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 Ltd this month and 96 per cent of Bank of Communications Co's US$500 million note sale.

Since the third quarter of 2015, a considerable amount of Chinese money has left the country to purchase dollar notes, according to JPMorgan Chase & Co. The nation's foreign currency reserves declined by US$108 billion in December alone, an indication of capital outflows.

"It's a currency view onshore investors take - investors want to invest in US dollar assets," said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong. "They would buy the names they know and they trust their own state-owned enterprises."

Bonds from investment-grade firms in Asia outperformed 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 US Federal Reserve is raising rates, the demand from regional investors is likely to stay strong, according to Schroder Investment Management Ltd.

"Asian banks have seen an increase in dollar deposits and are comfortable investing in regional credits," Rajeev De Mello, head of Asian fixed income in Singapore at Schroder Investment Management Ltd with assets of about US$446.5 billion under management. "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."