Tuesday, May 28, 2019 Stamford, CT USA — Asian fixed-income markets could experience meaningful inflows in the next 12 months from institutional investors around the world looking to take advantage of the higher yields on offer and a maturing Asian fixed-income marketplace to obtain acutely needed yield.

A majority of the institutional investors and intermediary fund distributors participating in a new study from Greenwich Associates invest in Asian government and/or corporate bonds, and a large share of those investors plan to increase (41%) or maintain (54%) their allocations in the next 12 months. Meanwhile, a quarter of current non-users plan to initiate investment in Asian fixed income in the next 12 months.

Two major trends are driving this expansion:

  1. For investors around the world, Asian fixed income represents a rare source of yield. Global interest rates have been lingering at or near historic lows for the better part of a decade. Opportunities to pick up yield with investments in Asian bonds have become even more attractive since the U.S. Federal Reserve’s decision to end its monetary tightening program and put off additional interest-rate hikes.
  2. Asian markets are becoming more liquid and more deeply integrated into the broader universe of global fixed income. The culmination of this process has been the inclusion of Asian bonds in popular benchmark indices, a move that will open the doors to a new wave of investors.

Secular Growth Trends

Among the top reasons given by study participants for increasing their exposures to Asian fixed income are higher yields compared to other fixed-income assets (72%), favorable macro view on the asset class (46%) and inclusion of Asian fixed income in global indices (41%).

Also driving demand for Asian fixed income is the growing appetite for Chinese assets. Two-thirds of study respondents pick China as the most attractive source of investment from a list of major government bond markets in Asia ex-Japan. Over the course of 2019 and 2020, 364 onshore Chinese bonds will be added to the Bloomberg Barclays Global Aggregate Bond Index. “That move marks a key moment in the integration of China’s US$13 trillion bond market into the global fixed-income market—and into the portfolios of investors around the world,” says Parijat Banerjee, Greenwich Associates Principal and co-author of Asian Fixed Income on the Rise.

Largely as a result of those factors, a predominant share of existing investors (95%) plan to increase or maintain their allocations to Asian fixed income in the next 12 months.

Current Allocations, and Growth in Asian Bond ETFs

Across the research sample, Asian assets make up 18% of overall fixed-income portfolios, including 5% in government bonds and 13% in corporate bonds. Average allocations range from 51% of total fixed-income assets among Asian private banking clients to 26% among institutional investors in Asia ex-Japan, to 7% in Europe, 5% in the United States, 3% in Japan, and 2% in Australia.

Currently, actively managed direct investments are the most popular vehicle for Asian fixed-income exposures. However, growing numbers of institutional investors and private banks are using or considering exchange-traded funds (ETFs), which many research participants see as having the potential to enhance liquidity and lower costs. “Based on current usage (as ranking the fourth most popular vehicle and the most popular passive vehicle) and the relatively large number of investors considering the use of ETFs, they may soon approach active mutual funds in terms of popularity as a vehicle for Asian fixed-income investments,” says Greenwich Associates Managing Director Markus Ohlig and co-author of Asian Fixed Income on the Rise.