From yield to maturity

With fears about investing in Asia at an all time low, the riskiness that came to define the region during the Asian financial crisis in 1997 appears set to leave without trace. After a decade of risk-driven high yields that brought breakneck growth to the local currency bond markets, conditions are finally easing. The yields have brought capital and development on an imposing scale, in a process that has apparently erased significant chunks of risk in the regional debt markets. While declining yields may be disappointing to many, many others will find comfort in this newfound market maturity.

For institutional investors, the shift marks the start of an important new phase in the development of the regional bond markets. More risk aware than their retail counterparts, they are less inclined to seek high yields that stem solely from credit risk calculations. Rather, the tendency is to make complex investment decisions based on the profiles of their businesses and the composition of their skills sets. This requires a spectrum of products.

Ten years of strong capital inflows, mainly from the West, has brought a level of depth and liquidity to the debt markets that regional players have hoped of for decades. What was once plain vanilla now comes in a spectrum of structures and tenures, and this represents opportunity to the sophisticated investor. The combination of liquidity and choice seems to have created a reliable environment in which financial institutions of all types can flourish.

One of the key investor groups in the new regional bond markets has been regional insurance and pension firms, as they seek to establish Asian industries in the segments. As such, the future incomes of hundreds of millions of Asians now lie in the hands of regulators, governments and corporations across the continent as they stamp their approval on the issuance and investment processes.

While the regional bond markets may have matured to some extent, the frameworks to which they are pinned are still new. Their capacity to withstand the burden of responsibility remains untested. That much of their emergence stems largely from inflows from a panicked, low-yielding West is cause for concern. At some point, capital will return back there posing a threat to liquidity. Meanwhile, the increasingly low yields are tempting all kinds of firms to issue. Vigilance among regulators remains paramount.


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