Selective rally set to continue in Asia debt market
Selective rally set to continue in Asia debt market
HONG KONG (Dow Jones): This year's rally by Asian bonds is expected to continue into next year, but at a much slower pace, debt investors and analysts say.
They also warn that investors will have to be much more selective in the coming year, accepting only modest gains in already expensive benchmarks, looking for value by extending debt maturities or moving to bonds with lower credit ratings.
Asia's continuing economic recovery, improving liquidity and a lack of new issues are expected to sustain recently strong demand for Asian bonds into 2000, analysts say.
"There's still considerable interest from the foreign (investor) side in Asia," Rosa Wang, deputy chief investment officer for Dresdner RCM Global Investors, said at a fixed income investor seminar this week in Hong Kong. "We still expect foreign flows coming in."
Benchmark Asian spreads have tightened significantly this year, as economies around the region have recovered and credit rating agencies have reversed earlier downgrades for some countries. During the second half, some Asian bonds narrowed to pre-crisis levels in spread terms, with some sovereign bonds issued during the crisis, such as the Korea '08, falling to lifetime lows.
Fading Y2K fears have helped sustain the rally, as an expected rush of third-quarter issues failed to materialize and investors who were supposed to shun seemingly risky Asian bonds instead snapped them up.
The spread over U.S. Treasurys on the Korea sovereign bond due in 2008 has tightened by around 225 basis points over equivalent US Treasurys from a year ago, to 170 points now, while that of Petronas 2006, the Malaysian benchmark until May this year, has tightened by more than 400 basis points, also to around 170 basis points
Stephen Taran, SSB's global head of sovereign credit research, told industry executives meeting in Hong Kong this week that over the next six months, the Malaysian '09 and Korean '08 bonds could both tighten to 150 basis points over Treasurys, from around 170 basis points currently. That compares favorably with high triple- B U.S. corporate, which are now in the range of 120 basis points, he said.
While some analysts also hold out hope for a liquidity-driven rally after the Y2K effect is past, most analysts warn that making money in Asian bonds will be much tougher in the year ahead.
"It's going to be a lot harder to make the kind of money in 2000 as in 1999," Albert Cobetto, managing director of Prudential Asia Fund Management in Hong Kong, told industry executives this week. He said he'll be looking more at sectoral plays, including financial institutions.
Dresdner's Wang says she has a "strong preference" for the North Asia region, and, in sectoral terms, sees value in cyclical such as steel and petrochemicals.
Still, market watchers warn that while the global environment appears more steady than a year ago, there are still potential problems ahead. Continued progress in Asian restructuring and reform, particularly in banking sectors around the region, needs to be monitored. Meanwhile, the outlook for U.S. interest rates, and their implications for foreign investment in Asia, remains unclear.