Local demand shielding Asian bonds after Brexit

Hong Kong

THE relative stability of Asian dollar bonds after Britain's vote to leave the European Union shows how rising local demand is shielding the region's debt from global market volatility, Pacific Investment Management Co and JPMorgan Chase & Co say.

"I see very limited impact on Asian bonds from 'Brexit'," said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan in Hong Kong. "Asian bonds continue to be underpinned by strong technical and local bids, and flight to quality."

The investor base of Asian bonds has become localised, protecting the notes from global shocks as regional investors tend to favour familiar securities during market turmoil. In 2015, wealth held by high net-worth individuals in the Asia-Pacific region surged 10 per cent to US$17.4 trillion, surpassing North America, according to Capgemini SA. Equity fund managers are also betting Asian shares will rebound because local investors dominate and the turmoil may delay an increase in US Federal Reserve interest rates.

"It's mostly Asians that are buying Asian credit," said Desmond Soon, the head of investment management in Asia outside of Japan at Western Asset Management Co in Singapore. "It tends to be a bit more stable because there is a natural home bias, a feeling that they know the company and they know the country."

The fallout from Friday's surprise referendum result was less dramatic than previous shocks.

The yield spread for investment-grade notes issued by Asian companies over Treasuries widened 12 basis points on Friday, the biggest jump in four months, to 238, according to JPMorgan indexes. That's still down from this year's high of 259 on Feb 11, when investors were worried over China's yuan. BLOOMBERG