Investors in Asia Pacific (Apac) are looking to increase their exposure to their local bond markets in the wake of interest rate cuts from the Fed.
This is according to a State Street survey of 600 asset managers, asset owners, family offices, private banks and commercial banks in Apac.
There is a general optimism among Apac investors regarding Asia’s economic prospects, according to the survey.
The surveyed investors plan to allocate nearly 46% of their assets to fixed income over the next 12 months, up from 37% a year ago, with many looking to increase their exposure to Asia Pacific bonds in particular.
“The recent cycle of interest rate hikes has revitalized the role of bonds in generating income, a function that had diminished during a decade of historically low yields prior to the US Federal Reserve’s rate increase in March 2022,” said Marie Tsang, fixed income ETF strategist for Apac at State Street Global Advisors.
“Apart from home bias, Asia’s robust economic backdrop is boosting Apac investor sentiment,” she said.
“The growing allocation to Asia ex-Japan fixed income among Apac investors underscores a growing confidence in the region’s fixed income markets as a source of stable returns.”
A home bias
When asked about which fixed income region they expect to perform best in 2024, 36% of survey participants said Asia ex-Japan, followed by 15% for Japan, and 14% for North America.
Only 9% expressed optimism about Europe’s bond market being a top performer.
“With inflation gradually coming under control, there is a widespread expectation of global interest rate cuts, which bodes well for the continued outperformance of many Asian bond markets,” said Kheng Siang Ng, Apac head of fixed income and head of Singapore at State Street Global Advisors.
“Investors are feeling more optimistic about the region compared to more mature markets.”
“Another reason for the increasing confidence in Asian fixed income is the markets are becoming increasingly investor-friendly, with many countries liberalizing their capital markets and expanding their bond investor base through regulatory reforms and enhanced financial infrastructure,” Ng added.
Recent examples include initiatives in the Chinese bond market where Bond Connect and Swap connect have facilitated mutual market access and improved hedging efficiency for international investors.
A focus on income and diversification
The survey also found that 41% of Apac investors are investing in bonds to generate income, compared with 31% who are seeking diversification and 30% who are motivated by sustainability-related goals.
Ng said: “A lot of investors are now looking to diversify away from their traditional bond exposure, recognizing that the various markets in Asia behave differently.”
“The Asia fixed income landscape offers diverse economies, along with stability, attractive yields, and a growing diversity of domestic investor bases in terms of types and sizes.”
Apac investors also have a preference for short- to medium-term maturities, according to the survey.
64% prefer bond maturities up to 10 years, and the 6–10 years range is the most popular, at 46%. Just 7% prefer to hold maturities over a period of 15 years.
They are also more willing to move up the credit curve. A year ago, 66% of institutional investors said that the lowest-rated bonds they were willing to hold were all rated single-A and above. This has now risen to 71%, and is 74% for investing intentions in 12 months’ time.
Tsang explained: “Local institutions tend to favor sovereign and quasi-sovereign bonds for their higher credit ratings and relative stability. Apac investors — particularly life insurers, banks and pension funds — have an ongoing appetite for investment-grade bonds, and they represent a key source of capital flows into these assets.”
Despite the optimism, Apac-based investors still have concerns about recession (37%) and inflation (37%), followed by geopolitics and currency depreciation (35% each).
