Uncovering Asia’s Diverse Fixed-Income Landscape

The Asian fixed-income market is a multi-layered environment that offers investors exposure to varied opportunities across local and hard currency bonds.

Market participants and the media can sometimes view the Asian fixed-income landscape as homogenous. However, given the various stages of economic and regulatory development across the region, a closer look at the Asian bond market reveals a diverse terrain with a broad spectrum of investor types and bond issuance.

The total amount of outstanding local-currency bond issuance in East Asia, for example, at the end of September 2023 was US$23.5 trillion.¹ This amount was split three ways, with US$14.7 trillion in government bonds and US$8.3 trillion in corporate bonds. The remaining US$0.5 trillion reflected central-bank bonds issued, for example, to manage interest rates.²

Conversely, the amount of outstanding hard-currency debt (bonds issued in foreign currencies) is smaller. Only US$41.1 billion was issued in the September 2023 quarter, compared to US$2.5 trillion in local-currency bonds.³

In East Asia, advanced economies like South Korea and China usually issue more hard-currency bonds, as companies operating in these territories often require higher funding for overseas-sourced goods or services. These bonds will be aimed at foreign investors, so it tends to be businesses with sufficiently robust credit profiles that can raise funds in this way.

The Local Currency and Hard Currency Mix

Farther afield, less developed markets like Indonesia see lower demand from overseas investors for hard-currency bonds. The difference is quite significant, with South Korea issuing US$15.2 billion of bonds in a G3 currency (US dollar, euro, and Japanese yen) during the third quarter of 2023, while Indonesia only issued US$658 million. Cambodia, Laos, the Philippines, and Vietnam did not issue any G3 hard-currency bonds in the same period.⁴

Furthermore, hard-currency bond issuance makes up a lower proportion of the total Asian bond market compared to the US or Europe. In 2022, hard-currency bonds across Asia accounted for 12.6% of all types sold, while the average across the rest of the world was around 36%.⁵ This is because many Asian companies seek to satisfy their borrowing needs onshore, although the factors determining how companies raise funds across markets vary. Domestic investors, like pension funds, will be more attracted to local-currency debt as this removes foreign exchange risk and will more closely match their liabilities.

Sustainable Bond Issuance Continues to Grow

Sustainable bonds, also known as green, social, sustainable, and sustainability-linked bonds, are often issued to finance various infrastructure projects, including (among others) improving electricity networks or boosting waste management systems.⁶ For instance, the Asian Infrastructure Investment Bank launched a US$3 billion bond in January 2024, which adds to the more than US$20 billion to the amount it has raised over the past five years.⁷ The split between sustainable local-currency and hard-currency bond issuance is about 70/30.

The sustainable fixed-income market in Asia Pacific is expected to grow by about 10% to US$260 billion in 2024.⁸ In a similar report, S&P estimated that the global market will reach around US$1 trillion, so Asia’s share of the total could accelerate.⁹

The Main Investors in Local-Currency Government Bonds

Drilling deeper, investors in local-currency government bonds are typically grouped into banks, asset managers, pension funds, insurance companies, and central banks. The type of investor differs across the region. In China, for example, banks are the primary holders of local-currency government bonds – at 62%. In contrast, banks in Thailand only hold 24%, with insurance companies and pension funds playing a more prominent role.¹⁰

Economists and investors generally agree that a good mix of investors will result in a more efficient and competitive market. A common way of measuring market concentration is the Herfindahl–Hirschman Index. The higher the index, the less diversified the investor profiles are. The Asian Development Bank, in a recent analysis, showed that Vietnam and China both scored highly on the Herfindahl–Hirschman Index, while Indonesia, with its considerably broader mix of investors, scored lower, as did South Korea.¹¹

Market Developments for the Remainder of 2024

From a macroeconomic perspective, the Asian local-currency bond market continues to offer investors potentially rewarding opportunities, especially as some yields look positive compared to other territories, such as the eurozone. In the hard-currency market, government issuance appears attractive, given the spreads on offer.

Challenges exist, and we are mindful of US-dollar strength and how this could affect inflation, especially in emerging Asian economies. We are also observing how China fares over the medium term. Areas of concern include the debt levels of certain property developers and local governments, as well as a sluggish consumer. Yet, the government has several financial stimulus options at its disposal. This boosts the likelihood that China can navigate these potential roadblocks.