Asia is leading this year's global bond boom. Investors' hunger for yield explains much of the growth in bond issuance in the cash-rich region. But as banks retreat and equity markets slump, companies are also eager for new sources of financing. Even if the market is overheated, the long-term trend is up.
Global debt issuance, including corporate and sovereigns, rose by a modest 4 per cent in the first three quarters of 2012. In Asia, however, bonds denominated in U.S. dollars, euros and yen have jumped to $119-billion so far this year, up from $76-billion for the whole of 2011. Domestic markets are even stronger: Issuance of Chinese corporate bonds surged to $300-billion in the first 10 months of the year, from $217-billion in the whole of 2011.
Cyclical factors are fuelling the increase. Low rates and tight spreads have made borrowing from the bond market very attractive. Poor returns on stocks and the perceived lower risk of bonds have also encouraged more investors to pile in. This enabled Soho China, a mainland property developer, to issue Asia's first 10-year high-yield bond on Nov. 1.
Asian private banking clients are also proving eager buyers: high-net-worth individuals snapped up 60 per cent of a $500-million perpetual bond issued by Li & Fung, the Hong Kong-based logistics and sourcing group.
Yet while the market shows signs of overheating, a total reversal looks unlikely. Higher capital ratios and funding costs for banks have made loans costly. As Asian bond markets become deeper and more liquid, they are attracting new investors from outside the region. More deregulation will also help, such as future liberalization from Chinese authorities for pension funds to invest in corporate bonds.
The path will not always be smooth. For example, the formerly overheated market for dim-sum bonds is now cooling: the volume of yuan-denominated bonds issued outside China was down 10 per cent in the first nine months of 2012. Yet since Asia's corporate bond market is still underdeveloped – half of China's total financing in the first 10 months of 2012 came from banks, compared to less than a quarter from corporate bonds and equities – there is plenty of scope for it to catch up.