Asian bonds – bounding forward?

Over the past couple of decades, the Asia Pacific bond market looks to have shifted from nascent to potent. In 2006, according to the International Capital Markets Association, Asian cross-border bond issuance was only US$107 billion. By 2021, this figure had risen to $614 billion. The Covid-19 pandemic and geopolitical issues caused a pullback since then, but the market is now rebounding. And the commentators in this issue confirm that, barring any more exogenous shocks, Asia is embarking on another epoch of benign growth, where default risks look manageable and bond returns are likely to gain strong impetus from the positive macroeconomic environment.

One intriguing dimension of the trends covered in the main article in this issue is the interplay between US dollar-denominated bonds and local issuance. Asia’s continuing growth will require continuing finance, and the potential for US dollar issuance and investment is likely to remain correspondingly high. At the same time though, local issuance has grown within many Asian markets, often providing issuers with comparatively cheaper access to funding than if they had tapped into the international US dollar bond market. There are signs then, of a growing preference for local sources rather than US dollar debt, where available. It will be very interesting to see how these two trends play out against each other.

Another interesting aspect of this development is the proliferation of green bonds, and bonds issued by sustainable enterprises or organisations. According to Hong Kong official figures, the Hong Kong sustainable debt market experienced a 236% year-on-year increase to rise to $18.2 billion in 2023, making it the fifth largest sustainable debt market in the world, and Asia’s largest issuer of green bonds. Furthermore, 92% of this issuance volume came via the HKSAR government. Meanwhile, as detailed in the article in this issue, renewable energy is emerging as a major theme for debt investment in India, riding the subcontinent’s high overall economic growth. And Australia began its first ever green bond issuance at end June 2024, attracting roughly three times the initial volume of some $4.6 billion in bids from some 105 interested investors worldwide.

This strong sustainable component of the overall growth picture for Asia Pacific is doubly welcome and implies that the region could be an increasingly important destination for debt investors looking to construct sustainable portfolios. Sustainability plus strong underlying growth could make for a very attractive investment proposition – never mind the diversification benefits away from Western issuers.