Renewed foreign interest in Asian bonds

KUALA LUMPUR: There is renewed foreign interest in Asian bonds since the start of the year due to anticipation of higher returns than elsewhere.

"Resident capital reflows in the first half of 2009 were the largest in this decade, reflecting expectations that the returns on East Asian local currency bonds will outperform those of foreign securities," Securities Commission Malaysia managing director Datuk Ranjit Ajit Singh told the audience at the Asian Bond Markets Conference yesterday.

He added that foreign investment in local currency denominated bonds had recovered throughout the region, mainly in Indonesia, Malaysia and South Korea.

According to Ranjit, foreign holdings of government and corporate bonds in Malaysia have grown to RM48 billion as at end-September, which is an increase of more than 20% from its low at the beginning of the year.

"We should be encouraged by the renewed interest in foreign investment into our domestic bond markets, as highlighted by the World Bank recently," said Ranjit. He urged the region to embark on a more flexible framework to facilitate more cross-border investments into domestic bond markets.

Also, he pointed out that intra-regional foreign direct investments were expected to grow rapidly in tandem with increased economic integration; thus financing those investments via bond issuance was vital to avoid the vulnerability of short-term bank borrowings.

On the strengthening of Asian bond market regulatory frameworks, Ranjit said authorities should consider benchmarking their policies and practices against key markets regionally and internationally, such as by including government bonds in leading international bond indices, namely Citibank’s World Government Bond Index.

He said the Malaysian bond market had benefited from being included in the index by attracting a stable source of foreign investments.

Commenting on the corporate bond market, Ranjit noted that due consideration should be given to establishing a facilitative issuance framework, including allowing for medium-term notes programmes.

This would contribute towards increasing the supply of local currency bonds, as issuers could time the market to raise funds as and when the prevailing rates were favourable.

He also said Asian bond markets should create regional bond funds targeting investments into a basket of local currency bonds in the region, which would in turn promote regional financial flows.

Meanwhile, Asian Development Bank vice-president Bindu N Lohani said while net bond issuances in emerging East Asia had risen 9.5% year-on-year in 3Q09, the current crisis should spur the regional bond market to move to "the next level".

"We should be looking as much at market quality as we instinctively do with bond quantity," he said, adding the regional market should improve market regulation and infrastructure to attract more issuances and a wider array of investors.

He said, however, the current crisis posed several challenges to Asian bond markets, including limited liquidity, which impeded development, hampered the pricing of bonds and the ability of central banks to carry out open market operations and finance government deficits at lower costs.