[SINGAPORE] In three months marred by volatility, bond markets in Asia stood out for their relative calm. Local investors are to thank.
While the Shanghai Composite Index surged 16 per cent only to plunge double that, Asia's riskiest notes rose 0.8 per cent. As Greece teetered toward default and an index of European government bonds slumped 2.2 per cent, Asian corporate dollar bonds lost 0.5 per cent.
Such resilience is due in part to home bias. The share of dollar debt from Asia able to be purchased by US investors dropped to 22 per cent this year from 47 per cent in 2010 because not as many notes have Securities and Exchange Commission registration or 144a rights, which are requirements for North American participation. As a result, almost 75 per cent of all dollar notes sold over the past 12 months have been bought by investors in the region, Bloomberg data show.
"The fact more investors closer to home have put their money in Asian bonds means there's less panic," said Neel Gopalakrishnan, an emerging markets fixed income analyst at Credit Suisse Group AG's private banking and wealth management unit. "There are fewer US investors involved, who tend to be sell first, ask questions later when negative news breaks."
Bonds in Asia have resisted even the recent turbulence in Chinese stocks. Equities in Shanghai are mostly traded by local individuals who don't have access to international debt markets, said Ben Sy, the Hong Kong-based head of fixed income, currencies and commodities for Asia at JPMorgan Chase & Co's private banking unit.
When Shanghai shares dropped 8.5 per cent Monday, their biggest one-day plunge since February 2007, China Petrochemical Corp's US$2.5 billion of 2020 securities - the most liquid of all offshore corporate notes from China - barely flinched, rising 0.04 cents to 98.082 cents on the dollar, the highest in more than two weeks.
Agile Property Holdings Ltd's shares have tumbled 31 per cent over the past three months. Its US$500 million of 8.375 per cent 2019 debentures have returned 3.8 per cent since April 30, prices compiled by Bloomberg show. That strength is also partly due to millionaires in the region, who bought 44 per cent of the debt.
"I believe one of the reasons the Chinese corporate market has remained so resilient in the face of the stock market volatility is the robust and sticky private banking bid," said Todd Schubert, the head of fixed-income research at Bank of Singapore, Oversea Chinese Banking Corp.'s private banking unit.
According to a June 17 Cap Gemini SA and Royal Bank of Canada report, the rich got richer faster in the Asia-Pacific region last year than any place in the world. People with at least US$1 million in investable assets grew their wealth by 11 per cent to US$15.8 trillion, surpassing North America's 9 per cent and Europe's 4.6 per cent.
The region's bonds have also proven immune to turbulence in Europe caused by Greece. And because Asia is a net importer of oil, the drop in commodity prices is a boon.
Crude has fallen 20 per cent since April 30 and shares of China National Offshore Oil Corp have decreased 27 per cent. The state-owned company's bonds due 2019, its most liquid, have lost only 2.8 per cent.
"Asia is a safe haven of sorts," Mr Sy said. Investors "have to invest somewhere, there's still a lot of liquidity around the world." Another magnet is Asia's relative strong economic growth. Although expansion in China was the weakest last year in more than two decades, 7.4 per cent's not bad compared with Russia at 0.6 per cent, Brazil at 0.2 per cent and the 2.4 per cent the US turned in.
"Most Asian economies are fundamentally strong with relatively stable currencies," said Brigitte Posch, the London- based head of emerging-market corporate debt at Babson Capital Management LLC, which managed US$219 billion as of June 30.
"Asian bonds have also historically enjoyed strong local support with private banks - local investors - having been large sponsors of bond issues."