As U.S. and European markets continue to sputter amid the global economic uncertainty, emerging market bonds in Asia have been quietly gaining favour as alternative safe havens – with relatively strong security, yet attractive yields. Experts however are worried whether a massive surge of money may end in a crash; though, for the moment at least, Asian sovereign bonds are showing surprising resilience.
Asian Sovereign Bonds: The New ‘Safe Havens’?
Can The Asian Bond Market Provide Shelter From The Global Financial Storm?
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Asian bond markets still have some way to go to achieve the levels of the US and European bond markets, but according to a recent paper by three Bank of International Settlements (BIS) economists, they are already being regarded by investors as something of a "safe haven" in difficult times.
The BIS view is supported by data from the US research house EPFR Global. It found that funds focused on Asian emerging market bonds attracted some $14.4 billion in the first quarter of 2012, by comparison with just under $2 billion last year.
And according to a CNBC report, the average yield on a local bond benchmark such as the HSBC Asian Local Currency Bond Index is between 4-5 percent. This is a very attractive yield at a time when US Treasuries are yielding below 0.6 percent and the yield is all the more attractive when you consider the very benign government debt position of some emerging markets.
CNBC points out that Indonesia's public debt amounts to less than 25 percent of GDP while a good deal of its growth is driven by strong domestic consumer demand rather than by exports. The Indonesian rupiah 10-year bond pays some 6.05 percent, for example.
The BIS report, by the Bank's chief economist, Ken Miyajima, and two of his colleagues, M. S. Mohanty and Tracy Chan, starts from the premise that what were once considered to be safe assets, such as US treasuries, or UK and German bonds, are no longer viewed as either particularly safe or particularly rewarding, by large numbers of investors.
This means that the pool of "safe haven" assets is shrinking dramatically and investors are having to think laterally and to look elsewhere. In the hunt for yield plus security, these disillusioned investors have discovered the local Asian bond markets and are piling in. As a result, these bond markets are now paralleling established "safe haven" markets in the way they perform through crises, and are showing surprising resilience.
