Asian Bond Market Offers Few Options for Investors

From BlackRock: As the intensifying search for yield goes international, Matt Tucker examines and shares his thoughts on the different Asian bond markets.

The final stop of my whirlwind global bond tour is Asia. The challenge is trying to talk about the entirety of the Asian bond market in 700 words or less given that the economic conditions, bond markets and investment opportunities vary widely across the region. To tackle this challenge, I will split the countries into three groups.

1. Large economies with limited bond markets

When people think about emerging investment opportunities in Asia, China and India tend to come up first. These two economies are likely to become increasingly important as the Chinese and Indian economies continue to expand, which could present many future opportunities for investors. However, the challenge is that today these bond markets are very difficult to access for foreign investors. Limitations on who can invest in local bonds, restrictions on how money is allowed to flow into and out of these countries, and the small overall size of these bond markets make investing there tricky. For comparison purposes, the U.S. bond market is over $19 trillion in size, as opposed to just $282 billion for China and for an Indian market that has not yet developed enough to be included in the Barclays indexes (source: Barclays Multiverse Index as of 7/29/16). Because of these reasons, neither country is included in most major global bond indexes. There may be fixed income opportunities in these markets down the road, but for now they are very limited.

2. Negative yields

Japan is the largest accessible bond market in Asia (source: Barclays Multiverse Index as of 7/29/16), but the problem is the yields for many local bonds arenegative. The Bank of Japan (BOJ), in an aggressive quantitative easing campaign, has not only set short-term interest rates at -0.10% but also has bought back bonds to drive prices up and yields down. As a result, yields on government bonds with maturities of 10 years or less are negative, according to Bloomberg data. Japan does not present much of a yield opportunity right now.

3. Everyone else

The balance of countries in Asia present more interesting opportunities. To better focus our discussion, I’ll concentrate on investment grade markets. As shown in the chart below, government bond yields in Australia, Singapore, Hong Kong, Korea and Thailand are positive (source: Bloomberg as of 8/29/16). But even among these positive yielding markets, interest rates on government bonds there are low.

And, the local corporate bond markets in these countries are not very well developed, which means, unlike in the United States, there are not many opportunities outside of government securities.


Editor’s note: ETF investors seeking Asian bond exposure can look at the PowerShares Chinese Yuan Dim Sum Bond Portfolio ETF (NYSE:DSUM) or the Global X GF China Bond ETF (NYSE:CHNB), which yield 3.27% and 3.29%, respectively.

This article is brought to you courtesy of BlackRock.

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