DCM: Boom time for Asian bonds
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DCM: Boom time for Asian bonds

Corporates respond to shrinking bank lending; Electronic trading on the rise

The debt markets of Asia are surging ahead, with issuance last year reaching record levels and fuelling hopes that 2013 might be better still.

International bond issuance from Asia, ex-Japan, broke the $100 billion mark for the first time last year. Some market sources said a flurry of deals late in the year might have pushed the figure past $200 billion.

Economic expansion and asset growth across the region are driving this period of sustained expansion, with money flowing in from institutional investors and wealthy individuals alike. Many corporate borrowers are looking to the bond marketsin preference to bank loans, which are becoming less readily available across the region.

In recent months, according to Greenwich Associates, growth has been influenced by a number of market forces that have combined to drive Asian institutions towards the safety of government bonds from G7 countries.

The development of electronic trading across the region is also gathering pace as a result. A recent report from Greenwich says that the steady development of the region’s fixed-income market is best exemplified by the growth of domestic-currency bond markets and by the increasing relevance of local Asian banks as a source of trading activity.

The Greenwich report was based on more than 1,000 interviews with fixed-income market participants at domestic and foreign banks, private banks, investment management companies, insurers, hedge funds and central banks across the Asia Pacific region.

Local threat

Local banks in Asia are beginning to pose a greater threat to international banks across a range of asset classes, finding business particularly from small and medium-sized companies. During a period of often extreme market volatility, Greenwich points out that Asian investors gravitated to G7 instruments as part of a broad flight to quality, and trading volumes in Asia have been pushed higher by investors’ increased appetite for G7 government bonds.

Trading volumes in Australian government bonds also remained strong during the year as investors continued to take advantage of interest rates that remained higher than those of other developed economies.

Domestic banks accounted for 44% of overall fixed-income trading volume in 2011–12, up from just 38% the previous year.

"We expect fixed-income trading volumes to continue climbing in the years ahead as the institutional and retail investor bases continue to expand," says Abhi Shroff of Greenwich.

The growth of electronic trading across the Asia Pacific region is another clear trend that looks set to establish itself still further over the coming year.

In the year ending July 2012, the most recent period for which figures were available, electronic trading platforms captured 41% of G7 government bond trading volume generated by Asian institutions, up from just 29% the previous year.

Fixed-income dealers are beginning to embrace the move to lower-cost trade execution, and some dealers are actively encouraging the move for their institutional clients.

Market sources say several fixed-income dealers have been investing heavily to upgrade their electronic trading platforms and are competing aggressively for trading volumes.

"Global banks are adopting new and more conservative strategies due to stricter capital reserve requirements," says Greenwich Associates consultant James Borger. "As a result, they are narrowing their focus to a limited number of large and potentially lucrative institutional fixed-income clients in Asia. Electronic platforms provide a cost-effective means of covering the rest of the market."

Electronic Trading Activity G7 govt bonds

Of all surveyed Asian institutions, 59% used electronic trading systems for G7 government bonds last year, up from 54% in 2011. Approximately three-quarters of institutions in Australia/New Zealand trade G7 government bonds electronically, as do two-thirds of institutions in Singapore. Institutions that already trade electronically are also routing a greater proportion of their trades through electronic systems. In 2010-11, Asian institutions trading G7 government bonds electronically routed 43% of trading volume in these products through electronic platforms. In 2011–12 that share increased to 57%.

Bond record

Last month looked set to be a record month for bond issuance, with several companies set to come to market. Guangzhou R&F was planning an unrated seven-year bond to be led by Morgan Stanley, Goldman Sachs, Deutsche Bank and Citi. KWG Property, Cheung Kong Holdings and JG Summit were also planning deals. Some bankers estimate that bond issuance in January might have exceeded $25 billion.

In supranational deal news, the Asian Development Bank returned to the US dollar bond market in mid-January with a $1 billion seven-year global benchmark bond issue.

The bonds, with a coupon rate of 1.375% a year payable semiannually and a maturity date of March 23 2020, were priced at 99.888% to yield 17.45 basis points over the 1.125% US Treasury notes due December 2019.

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