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Global bond markets have taken a beating in 2022, largely consolidating as borrowing costs have risen with interest rate hikes. Asian corporate bond issuances fell lately as well due to the weak economic outlook. As per data from Asian Development Bank, the issuances fell 4.9% quarter-on-quarter from June to August, with a total corporate debt financing of $812.6 bn.
The S&P Pan Asia Corporate Bond Index, which tracks the performance of local currency corporate bonds from 10 countries in Asia, has fallen 6.54% in 2022. While the negative figure might seem like a deterrent for investors, Asian corporate bonds are faring much better compared to their developed peers around the globe. The S&P Developed Corporate Bond Index, which tracks the performance of investment-grade corporate bonds across global developed markets, is down 16.32% in 2022.
“Asia’s corporate bond market has become a strategic asset class that offers decent levels of income. Crucially, it is also predominantly investment grade,” Qian Zhang, senior client portfolio manager at Pictet Asset Management, had said in 2021.
Interest rates have an inverse relationship with bond prices: when interest rates rise, bond prices fall. This makes bonds less attractive for investors as they get lower interest rates on fixed-rate bonds, while corporates have to contend with higher coupon payments for new bond issuances. As such, a hawkish US Federal Reserve as well as other central banks in Asia have reduced the attractiveness of Asian corporate bonds. However, likely peaking inflation and increased foreign inflows may help Asian bonds, while a soft landing of the US economy may turn the Federal Reserve less hawkish on rate hikes.
On a month-on-month basis, inflation rose in Japan, India and Singapore, whereas China, Thailand, South Korea and the Philippines saw inflation easing in August. Data shows that inflation in Asia might be peaking, and central banks may take a conservative approach going forward. Meanwhile, foreign investors are turning to Asian markets as the recent consolidation has made assets cheaper. A Bloomberg report said that India and Indonesia saw net foreign bond inflows in August, a first in the past six months, whereas Thailand’s debt too attracted foreign investors for the first time since May.
Asian corporate bonds and interest rates
The Asian Development Bank in its report says that expansion in Asia’s corporate bond market had moderated due to uncertainties and elevated borrowing costs from central bank rate hikes.
China’s zero-Covid strategy has caused a slowdown in the economy. Bank’s credit growth has stalled, while the property sector continues to weigh on the broader economy. Beijing has kept a diverging ultra-loose monetary policy even as the rest of the world has embarked on steep rate hikes, which is now reflected in the corporate bond issuance of Chinese companies. The country surged ahead of the US in corporate bond issuance, totalling $306 bn, in July and August, as per data compiled by Bloomberg. Yuan corporate bond sales have overtaken dollar bonds in recent months, as Beijing tries to increase liquidity to spur economic growth.
Yuan note issuance has declined this year by 6%, while dollar corporate bond sales fell 40% to an 11-year-low as of September 6. The diverging monetary policies of the US and China mean borrowing in yuan is much cheaper for corporates than borrowing in dollars. China’s corporate bond market has shown resilience amid a sell-off in most of Asia, with the S&P China Corporate Bond Index rising 2.09% in 2022.
South Korea’s corporate bond market is the largest in Asia behind China. Growth in corporate bonds outstanding eased to 0.5% quarter on quarter during Q2 of 2022, as a relatively large volume of maturities outpaces recovery in issuances. Back in June, South Korea’s Financial Supervisory Service in a report said that corporate bond issuances for the first six months of 2022 fell 12.7% to 96.1 tn won ($68.8 bn) from the same period of last year.
In India, the corporate bond market makes up 18% of GDP. Reserve Bank of India’s deputy Governor Rabi Shankar in August said that India’s corporate bond outstanding had crossed $500 bn in March 2022, compared to $130 bn in March 2012. Annual issuances during this period rose to $75 bn.
Regulators in India are trying to push issuances of corporate bonds higher, in a bid to achieve the Narendra Modi government’s goal of making India a $5 tn economy. A report published by a domestic news agency showed that corporate bonds outstanding had increased 11.2% in the past year. However, the problem is that 98% of corporate bond issuances were done using the private placement route in FY22, a trend which has largely dominated new issuances over the past decade.
In the ASEAN region, corporate bonds outstanding rose 4.4% quarter on quarter in Q2 of 2022, reversing from 1.9% contraction seen in the first quarter, as per ADB. Singapore saw its corporate bond segment expand 1.4% during the second quarter as issuances rose 113%. Thailand saw its corporate bond market swell by 4.6% during the second quarter, higher than the 1.2% growth posted in the first quarter of 2022. Total corporate bond issuances rose 36.3% during the period.
In Malaysia, corporate bond market growth weakened to 0.1% during the second quarter, from 0.3% in the first quarter as maturities outstripped issuances. Vietnam’s corporate bond market swelled by 7.4% during the second quarter as issuances got a boost from relatively low-interest rates. The State Bank of Vietnam is the sole bank in the region that is yet to increase its key interest rates.
Southeast Asia’s largest economy Indonesia saw its corporate bond market shrank 2.3% during the same period as issuances declined. The Philippines too saw a contraction of its corporate bonds outstanding by 7.1% as rising interest rates curtailed issuances.
“There’s a general perception of a rise in potential defaults as companies face more stringent competitive environments,” says Michael John Lytle, CEO of fixed income ETF provider Tabula Investment management during an interview with AsiaFundManagers.
“I think for investors who are entering credit markets today that’s generally positive because it means you’re entering at higher absolute rates, higher credit spreads and therefore you’re being compensated for a riskier environment. So from an entry-level perspective, I think that the environment is much more interesting today than it was six months ago.”
