Posted inAsset Class in Focus

A compelling case for East Asian local currency bonds

Global investors should not ignore the East Asian local currency government bond market as an emerging asset class in its own right, according to Matthew Arnold, head of SPDR ETFs for State Street Global Advisors in Singapore.
A compelling case for East Asian local currency bonds
Matthew Arnold, State Street Global Advisors

Having grown rapidly over the past decade, the East Asian local currency government bond market presents a significant opportunity for investors today.

The $7.5trn1 capitalisation of the markets that comprise the ABF Pan Asia Bond Index is testament to this. “To put some context around this number, the investable US high yield corporate bond universe totals about $1.5trn,2” Arnold said.

Further, East Asian local currency government bonds offer the prospect of higher yields and exposure to the favourable growth characteristics of the region.

Buoyant demand

Demand has come within the broader context of the growing appetite for Asian local currency bonds.

Although equity markets were incredibly strong in 2017, with State Street seeing investors large and small allocating to equity funds and ETFs, this was not at the expense of fixed income. There was significant buying of bond ETFs – especially if they provided exposure to emerging markets.

“One of the key drivers last year was investors getting more comfortable with the ETF structure as a means of investing in bonds,” Arnold said.

With yields remaining low in much of the world, investors have been increasingly focused on reducing their costs and getting value for money. “Fixed income ETFs are also very easy to use and enable investors to buy a portfolio of bonds in a single trade using the same infrastructure as listed equity trades,” he added.

When it comes to Asian local currency bonds in particular, most of the demand came from broad global emerging market bond funds and mandates. Notably, Asia outshone its two main competitors for local currency bond appetite – Latin America and Europe.

“Investors appeared to favour the superior growth and structural changes we see in the region today,” Arnold explained.

Portfolio diversifier

Part of the appeal is also the fact that Asian local currency bonds offer benefits such as diversification to typical multi-asset investors.

“If you look at a global multi-asset portfolio that invests in developed market equities, bonds and real estate, for instance, Asian local currency bonds should be something of a diversifier with unique risk and return characteristics,” Arnold said.

From a fundamental perspective, meanwhile, the region is generally experiencing strong economic growth. This has made the fiscal characteristics of the countries that make up the ABF Pan Asia Bond Index the envy of much of the developed world, he said.

“While the US Federal Reserve has started to raise interest rates, they remain at rock-bottom levels throughout much of the world,” Arnold added. “The yield pick-up offered by Asian local currency bonds should be desirable for investors worldwide.”

Currency considerations

Another key factor when investing in Asian local currency bonds relates to currency movements.

However, forecasting currencies is a notoriously difficult proposition. The assortment of “unconventional” monetary policies employed by central banks around the world has made it even more difficult. Plus, relative currency performance is driven by dynamics that range from technical to fundamental and usually include variables such as relative economic growth, inflation and interest rate expectations.

“If one were to generalise, you could say that over the long term, currencies tend to do well where the local economy is growing and monetary policies are sound and focused on maintaining price stability,” said Arnold.

This is important for international investors in Asian local currency government bonds because over time, much of their total returns will be driven by the performance of the basket currencies relative to their home currency. “This means that investors should hold a generally positive view on the prospects for Asian currencies relative to their own,” he added.

Invest in Asian local currency bonds with ABF Pan Asia Bond Index Fund. Visit to learn more.

¹Source: Amount outstanding in USD, Asia Bond Monitor (November 2017), Asian Development Bank as of 30 September 2017.
²Source: Bloomberg, total amount outstanding of the Bloomberg Barclays US Corporate High Yield Bond index is $1.34trn as of 31 December 2017.
FOR INSTITUTIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC. This material may not be reproduced, distributed or transmitted to any person without express prior permission and may not be distributed and published in jurisdictions in which such distribution and publication is not permitted.
PAIF is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. No action has been taken to permit an offering of units in PAIF other than those listed above. Past performance of PAIF is not necessarily indicative of its future performance. The prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited (the “Manager”) (Singapore Company Registration number: 200002719D, regulated by the Monetary Authority of Singapore) and authorized participants. The value of PAIF and the income from them, if any, may fall or rise. The semi-annual distributions are dependent on PAIF’s performance and are not guaranteed. Redemption of PAIF’s units could only be executed in substantial size through designated dealers and the listing of PAIF on the stock exchanges do not guarantee a liquid market for the units, and PAIF may be delisted from the stock exchanges. PAIF may use or invest in financial derivatives. This advertisement is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”).
The views expressed in this advertisement are the views of Matthew Arnold through the period ended 12 January 2018 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Past performance is not a guarantee of future results. All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Diversification does not ensure a profit or guarantee against loss. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices Limited and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices Limited or any of its members.
Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web:
Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong • Telephone: +852 2103-0288 • Facsimile: +852 2103-0200 • Web:
© 2018 State Street Corporation – All Rights Reserved. 1992878.1.1.APAC.INST Exp. Date: 01/31/2019

Part of the Mark Allen Group.