Major shifts taking place in the fixed-income markets should herald a shift in the way Asian bonds are priced, notes Lian Chia-Liang of Western Asset. They are already having an impact on how the US-based house goes about its business in the region.
For one thing, the firm’s head of Asian fixed income says brokers have confirmed something he has noticed: more and more Asia-based fund managers are bringing money back to their home region and investing in its hard- and local-currency corporate bonds.
“Let’s say I hold European bank senior debt that matures in April. I’m now less inclined to extend that with another bond of the same underlying credit, say five years out, than was previously the case,” says Lian.
“Instead, cash received will likely be redeployed back into this region, perhaps investing into a five-year issue from a Singapore- or Hong Kong-based bank,” he notes. “Home region bias is very strong [in Asia] at the moment.”
One result of this is that Western is seeking to increase the number of specialist-market counterparties it uses in the region. “We are initiating dialogue with brokers we don’t currently have relationships with,” says Lian. “It is likely we will end up with more than 50 brokers [from 43 at present].”
There are many non-traditional players investing in Asian fixed income now that didn’t in the past, he adds. “Pre-Lehman – say, five years ago – Asian investors didn’t really care about [highly rated] Asian fixed income,” he explains, “because they saw it as low yield, not attractive, and therefore not a compelling buy.”
But in recent years, as the universe of triple-A sovereigns has shrunk, they have been forced to look at this region, says Lian, noting that Singapore is the only sovereign in emerging Asia rated triple-A by all three credit agencies.
Yet in the past Singapore government bonds would have been seen as too low-yielding and issuance too small in terms of making a difference. Australia is another case in point, he notes: in early March, close to 80% of Australian government bonds – a record amount – were held by offshore investors.
The point is that investors are – and should be – reassessing their view of what is a safe haven, Lian argues, and Asia should not necessarily be priced as ‘Treasury-plus’ any more. “Why should Temasek bonds trade as Treasury-plus?” he says. “Perhaps in future the T should refer to Temasek rather than US Treasuries.”
Moreover, the growing demand both within and outside Asia for exposure to the region’s bonds means there are increasingly good reasons why new Asian issues should be priced in the Asia time zone.
“I’ve always wondered why Asian deals are priced in New York or London time. If demand here is growing, and Asia has the potential to take up the full amount, why can’t they be priced at 4pm Hong Kong/Singapore time?”
It gets cumbersome having Asian bonds pricing at 4pm New York time, he says – for example, it sometimes makes it tricky to manage cash positions or portfolio rebalancing. “I would love to see the day when Asian new issues are anchored by Asian investors and priced in their time zone.”
Meanwhile, one development Lian has noticed in Asia is increasing “cross-market pollination” – such as a Hong Kong-based entity diversifying its funding sources by issuing in Singapore dollar debt and vice-versa, or Korean banks issuing in Malaysian ringgit or Indonesian rupiah.
“More importantly, some of these have been on a reverse-enquiry basis,” he adds, “by getting one or two brokers to assess and gather interest and then launch an issue in Asia time.”
*See the upcoming (April) issue of AsianInvestor magazine for the full interview with Lian and more on how the desk is set up from a trading perspective.