Asian dollar bonds: A Giant Awakens

It’s been 20 years since the Asian financial crisis, when the region’s tiger economies suddenly turned tail and ran. Now they appear to have come roaring back. But these tigers are not identical to the old ones. No less fierce and agile, they are now more mature and resilient, and for investors today, more compelling than when they were cubs. 

July 2017 marked the 20th anniversary of the Asian crisis in which numerous economies descended into crisis as their debt spiralled and currencies collapsed. The contagion across Asia was exacerbated by the region’s dependence on a huge balance of US dollar-denominated liabilities, much of it owned by foreign investors who were quick to withdraw their capital. 

Over the subsequent two decades, Asian economies have recovered to become a remarkable economic force. The region now accounts for 45%^[1] of global GDP and 63% of global GDP growth^[2]. The region’s population has also continued to grow dramatically so that Asia now harbours about three-fifths of the planet’s population^[3] and is forecast to account for half the world’s middle class by 2020^[4].

In spite of the region’s phenomenal economic growth, Asian bond markets have been largely overlooked by investors from outside the region. But the hard currency Asian bond market has quintupled in size over the past decade and is growing too large for investors to ignore. Crucially, this growth in the market has coincided with a significant shift in ownership structure. Domestic Asian investors now account for more than three-quarters of new issuance take-up and are the dominant investor constituency. 

In this paper, we explore the implications of the rise in dollar-denominated Asian fixed income credit and consider the opportunity for global investors in this expanding asset class.

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