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Global institutional demand for Asian bonds to rise on attractive yields, index inclusion: State Street

ASIAN fixed income markets could see meaningful inflows in the next 12 months from institutional investors and private banking clients, amid higher yields and a maturing Asian marketplace.

This is according to a global study by State Street Global Advisors - the asset management arm of State Street Corporation - and Greenwich Associates.

The study surveyed more than 180 institutional investors and gatekeepers at private banks to determine their asset allocation to Asian fixed income.

More than half of the respondents invest in Asian bonds, and almost all of them (95 per cent) plan to increase (41 per cent) or maintain (54 per cent) their allocations in the next 12 months.

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Meanwhile, one out of four current non-users plan to start investing in Asian fixed income in the next 12 months.

Yield was the key reason for three-quarters of the respondents to increase their exposure to Asian fixed income in the next year.

“Asian fixed income represents a rare source of yield for investors around the world,” said Ng Kheng-Siang, Asia-Pacific head of fixed income at State Street Global Advisors.

“Global interest rates have been lingering at or near historic lows for the better part of a decade. Opportunities to pick up yield from investments in Asian bonds have become even more attractive since the US Federal Reserve’s decision to put off additional interest-rate hikes this year,” Mr Ng noted.

Other top reasons given by the study participants for increasing their exposure to Asian fixed income include the inclusion of Asian fixed income in global indices (41 per cent), growing market size and expanded product choices (37 per cent), and improved market liquidity (24 per cent).

There is also a growing appetite for Chinese government bonds. Two-thirds of respondents picked China as the most attractive source of investment, out of a list of major government bond markets in Asia excluding Japan.

“The inclusion of onshore Chinese bonds into global bond indices in April marked a key moment in the integration of China’s US$13 trillion bond market into the global fixed-income market - and into the portfolios of investors around the world,” added Ng. “We believe the Chinese bond market will continue to grow as investors see the benefits of portfolio diversification and the relatively higher bond yield Chinese bonds offer.”

Across the research sample, Asian assets make up 18 per cent of overall fixed-income portfolios, including 5 per cent in government bonds and 13 per cent in corporate bonds.