Why are investors in Asian bonds going local?

When investing in Asian bond markets, Asia’s hard currency bonds have traditionally been global investors’ mainstay. This may be about to change. According to the results from Eastspring’s global investor survey on Asian fixed income, 38% of all respondents say that they are likely to consider allocating into local currency bonds in the next 24 months. This is on top of the 43% who indicate that they already have an allocation to local currency bonds in their portfolios. Why are investors in Asian bonds going local?

Asia’s local currency bond market is sizeable (USD 20.3 tr1) and offer diversification as well as higher yields. Local currency bonds can be influenced by domestic monetary policies and be less correlated to developed market bonds, thereby providing greater diversification to portfolios. Most of Asia’s local currency government bonds also carry investment grade credit ratings2. Besides yield pick-up, local currency bonds can also enhance returns from potential currency gains.

Within the Emerging Market debt universe, Asia’s local currency bond market offers superior risk-adjusted returns across one, three and five years3. In addition, unlike the developed economies, Asian governments did not embark on large fiscal stimulus programmes in response to the COVID-19 pandemic. As a result, Asia’s external debt to GDP ratios are largely in a healthier state than developed and emerging market economies.

In the medium term, the outlook for the region appears more positive. Following a patchy recovery for most of 2021, Eastspring’s Asian fixed income team which is based in Singapore believes that higher vaccination rates should lead to a gradual re-opening of the region’s economies and lift growth. While US and Europe have recently seen sharply higher inflation rates, Asia’s inflation outlook remains relatively benign. As such, most Asian central banks, except for Korea, are likely to keep interest rates on hold over the next six to nine months. Meanwhile, the China central bank is expected to keep the yuan stable. This can help to anchor the Asian currency complex. In this environment, Asia’s higher yielding currencies may perform well. 

Global investors’ allocation to Asian local currency bonds


Source: Eastspring Investments

1 Includes government and corporate bonds. Asian Development Bank, Asianbondsonline, as at 31 March 2021; Asian markets include China, Hong Kong, Indonesia, Korea, the Philippines, Thailand, Vietnam, Singapore and Malaysia.
2 S&P local currency long term credit ratings. As of October 2021. Markets with investment grade rating include Taiwan, South Korea, Malaysia, China, Thailand, Singapore, Hong Kong, India, Indonesia and Philippines.
3 GBI-EM Local Global Diversified Index. As of December 2020.

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