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Asia's foreign bond bid matches China's 'savings glut' era peak

[TOKYO] Japan and a clutch of industrialised east Asian economies are increasingly snapping up overseas bonds, in such magnitude that it may be storing up financial risk, according to Oxford Economics.

"The increase in cross-border portfolio allocation might create a further buildup of vulnerabilities, especially among some Asian pension funds and life insurers," Guillermo Tolosa and Giuliano Simoncelli wrote in a note from the research group on Tuesday.

Unlike past surges of foreign fixed-income purchases, this one isn't due to an overall increase in capital outflows, Oxford Economics concluded. It's more a "recomposition of outflows towards bonds," the analysts wrote. Regulators in some locations, including Japan and Taiwan, have stepped up scrutiny or even placed outright caps on purchases of some foreign investments as domestic fund managers seek to avoid low or negative yields at home.

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Japan, Taiwan, Singapore and Hong Kong snapped up US$330 billion of foreign bonds in the first nine months of 2019, a similar pace to China's peak years of 2006-08, according to Oxford Economics. That's back when an Asian "savings glut" was blamed for countering the effect of US interest-rate hikes.

Demand from the four east Asian economies has helped to displace diminished appetite for foreign bonds from China, the analysts wrote. This group is forecast to step up purchases to US$400 billion this year, they also said. That may in turn exacerbate a shortage of risk-free assets, depressing global developed-world yields.

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