The rally in dollar denominated bonds in the Far East markets continues but local currency investmen...
The rally in dollar denominated bonds in the Far East markets continues but local currency investments are suffering under the weight of political concerns and supply issues.
Dollar issue bonds in the Far East excluding Japan sector have enjoyed a year-long rally and demand continues to outstrip supply owing to excessive liquidity in the region's banking system, according to James Blair, head of fixed interest at Aberdeen Asset Management Asia. He says he has been surprised by the durability of the rally in the region's dollar issue bond market but says the interest rate environment has led many investors to seek out yields wherever they can.
'The rally of Asian Yankees, dollar issues, is primarily a liquidity-driven rally, which has driven prices to levels that are frankly surprising. Global investors have been prepared to venture further along the risk spectrum in order to obtain scarce yield,' he adds.
Given the excess liquidity in the banking system caused by weak loan demand, which is driving down profitability in the banking sector, new issuances are heavily oversubscribed as institutions look to gain positive returns, no matter how low, at minimum risk, Blair believes.
The sustainability of the rally in Asian Yankees remains open to question, however yield spreads to US Treasuries have been tightening over the past month but both the demand and supply side remain healthy as investors seeking real returns cannot underweight the sector, notes Blair.
'Naturally there has been profit taking but some investors have been hurt being short in this market and may have no choice but to be neutral now. On the supply side, upcoming issuances remain substantial,' he says.
Conversely, domestic Asian bonds, although also still oversubscribed, have been less appealing, with good value and attractive yields hard to find.
Edwin Gutierrez, fixed interest fund manager at Deutsche Asset Management, says: 'A global upswing is needed as there is not a lot of value around now. Spreads remain tight and will do for at least the next six months.'
Blair is also bearish about domestic issuances.
'Asian bond yields have consolidated at current levels, mirroring price action in global interest rate markets. Additionally, supply issues and uncertain political backdrops have dampened appetite in several countries,' he says.
Political concerns are inhibiting interest in a number of SouthEast Asian economies. Gutierrez says: 'In Thailand, there is the ongoing case of the disclosure of prime minister Taksin Shinawatra's financial assets and whether he will be impeached. It cannot be discounted, but even if he were, he could probably still exercise a lot of control behind the scene.'
Gutierrez is also concerned about political uncertainty in the Philippines resulting from the country's impending senate elections. Although he believes that the end result will be positive, with a senate supportive of the president likely to be returned, Gutierrez remains cautious about the country, owing to the deep-seated and structural problems inherent in its financial system.
l Asian Yankees enjoying a sustained rally.
l Strong support for new issuances.
l China providing a port of calm.
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