Emerging Trends in Fixed Income Markets in Asia

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Emerging Trends in Fixed Income Markets in Asia

• Asian Local Currency Bond Markets

Robert Andrew, 16 February 2006
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Contents

• Asian Bond Markets Overview
• Global Growth Remains Strong
• Central Banks on Inflation Watch
• Fixed Income Market Implications

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Asian Bond Markets Overview

• From Crisis in 1997 to Problem of Plenty
• Asian Governments and Central Banks have tried to
  build reserves to protect against another
  currency crisis
• Large current account surpluses in Asia
• Complements large deficit in the US
• Improving finances and liquidity have helped
  development of Bond Markets across Asia

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Bond Financing in Asia
Credit Growth (Year-ended percentage change)

Philippines
Malaysia
India
Thailand
Singapore
Hong Kong
Sources CEIC IMF Thomson Financial,
Bloomberg Year-On-Year Growth in Credit ()
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Divergent trends in Bank Credit in Asia

• Bank Credit In Asia (except China India) fell
  in the aftermath of the Asian Crisis

Source IMF Outstanding Bank Credit as Percentage
of GDP
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Funded by High Global Liquidity
Source IMF
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Importers and Exporters of Capital

• Asian countries have been net exporters of
  capital
• The United States is the largest net importer of
  capital

Source International Monetary Fund, World
Economic Outlook database as of August 30,
2005. 1,3 As measured by countries current
account surplus /deficit (assuming errors and
omissions are part of the capital and financial
accounts). 2,4 Other countries include all
countries with shares of total surplus less than
2.1 percent / deficit less than 1.3 percent.
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Bond Market Development over the past 10 years
Local Currency Debt Securities Outstanding Per
cent of GDP

Sources BIS World Bank
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Size of Asian Local Bond Markets
Source BIS. As of 2004 Corporate Bonds do not
include Financial Institutions
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Regional Initiatives

• Asian Bond Market Initiative (ABMI)

• At least three major government-sponsored
  regional organisations in Asia are pursuing
  initiatives to promote and develop efficient and
  liquid bond markets in Asia.
• The aim is to enable better utilization of Asian
  savings for Asian investment.
• APEC promote securitisation and credit
  guarantee markets.
• ASEAN3 identify and remove impediments to
  market development.
• EMEAP ABF 1 and ABF 2.

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Contents

• Asian Bond Markets Overview
• Global Growth Remains Strong
• Central Banks on Inflation Watch
• Fixed Income Market Implications

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Global Economy Key Themes

• Global growth more balanced in 2006
• 2006 Expected Global GDP growth at 3.0 (3.0 in
  2005E)
• US growth likely to moderate from above trend
  level
• Higher growth led by domestic demand in Europe
  and Japan
• Continued strong growth in Asia
• Driven by China India

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US GDP Growth
Source US Federal Reserve
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US vs Europe Growth
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US Housing Market
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India Growth Remains Strong
Source Reserve Bank of India
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Global Economy
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Contents

• Asian Bond Markets Overview
• Global Growth Remains Strong
• Central Banks on Inflation Watch
• Fixed Income Market Implications

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Central Banks on Inflation Watch

• Rise in Global Inflation
• Rise in crude oil prices transmitting to rest of
  economy
• Strong Growth Rate
• Rise in operating rates (capacity utilization)
• Fall in unemployment
• Early signals of global capex cycle

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US Inflation High CPI, Low Core Inflation
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India Inflation Off 2004 Peak
Source Bloomberg
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Contents

• Asian Bond Markets Overview
• Global Growth Remains Strong
• Central Banks on Inflation Watch
• Fixed Income Market Implications

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Fixed Income Market Implications

• Robust Global Growth
• US Growth to moderate, but remain at/above trend
  growth
• Rest of World growth accelerating
• Inflation Rising
• Rise in core inflation as high energy prices
  feeds through to the rest of the economy
• Central Banks acting to reduce monetary
  accommodation
• Continued growth in an inflationary environment

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Fixed Income Market Implications

• Valuations moderately expensive
• Low absolute and moderate real yields
• Particularly in light of continued Fed and other
  Central Bank hikes
• Yield curve extremely flat 2Y-10Y slope inverted
  in the US
• Sentiment neutral
• Excess global liquidity continues
• Continued demand for duration from pension funds
• Inverted Yield Curve in US Market
• Continued hawkish stance of central banks

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