With Asian economies showing strong signs of improvement, the debt market is gradually finding its feet despite lingering Y2K concerns. In September, Thomson Financial Securities Data said Asian, euro and international bonds had an 'impressive' run from January. In that period, new bonds issued reached US$27.68 billion, compared with $14.42 billion in the same period last year, reflecting the particularly poor economic fundamentals in 1998, the group reported. Thomson said last month it foresaw a stronger trend for the rest of the year, based on improving market sentiment 'brought about by the strengthening of the region's economy'. 'Truly, Asia is on its way in regaining its standing pre-crisis,' Thomson said. Merrill Lynch's chief of Asia-Pacific debt capital markets, Samuel Poon, believes it will be some time before Asia reaches pre-crisis figures. 'Even in 2000, I don't expect it to reach pre-crisis standing,' Mr Poon said. 'If you look at 1997 [pre-crisis], the total of new interest issues was about $30 billion to $35 billion and I think that was the time that every single Asian country was growing at double digits. 'I believe that Asia should grow its equity before it chooses to grow with debt.' But the tide is turning. At the beginning of the year, some were fearing a Y2K meltdown for debt markets. As early as September, worries about the impact of Y2K on the Asian debt market appeared to be easing, with some analysts predicting a New Year's rally in bonds. Mr Poon said he believed the Y2K issue could well be a 'non-event'. 'I think people are getting more comfortable with it,' Mr Poon said. Analysts and traders have warned Y2K wariness will lead investors to sell off Asian and emerging-market assets in a flight to quality just before the end of the century. 'The psychology of trying to sell before everyone else appears to be getting replaced by deciding when to purchase to stay ahead of an expected Y2K rally,' Merrill said in an Asian credit report. 'Until now, the market had assumed substantial selling of holdings would begin from September, which prompted some selling ahead of time. 'Whilst few people doubt that lightning will strike some credits in Asia, interest in guessing the winners and losers looks to be receding.' But Asian corporates are not expected to issue bonds as the end of the year approaches, again due to Y2K fears. Issues that were already illiquid would become more so as the century draws to a close, Merrill said. 'Market psychology aside, we think that liquidity will be a real issue. Even if investors do buy in anticipation of a new millennium rally, we suspect that buying will be focused on liquid benchmarks,' Merrill said. External factors are Merrill's biggest concern for Asian credit, particularly the impact of a weak bond market in the United States. Salomon Smith Barney reported that in May, despite a relatively volatile bond market on the back of a US Federal Reserve monetary tightening bias, Asian bond spreads widened only moderately. The investment bank said that with higher US interest rates, Asian emerging markets were much better positioned than their Latin American peers. 'On one hand, external borrowings in Asian countries - with the exception of Indonesia - are at relatively low levels, which means their debt-servicing capacity is not that sensitive to US interest rates,' Salomon said earlier this year. 'On the other hand, with large current account surpluses and high domestic savings rates, most Asian economies' reliance on foreign capital inflows for the recoveries is only marginal.' In August, Chase Manhattan said it believed Asia had become more attractive for investors in US dollar-denominated bonds as improving fundamentals lured even first-time investors. Head of international fixed income research (Asia) Greg Batey said Asian spreads had narrowed recently on weakening economic and political concerns in the region. To take advantage of this, Chase Manhattan launched the Chase Asia Bond Index, a fixed-income benchmark comprising bond returns and statistics for eight Asian markets on a daily and monthly basis. 'In Asia there was Daewoo [the South Korean group's debt restructuring], ongoing concerns about China, the Bank Bali scandal [in Indonesia] . . . if you recall back in July there was concern about where [US] interest rates were going, so that caused Asia spreads to widen and in the last couple of weeks, these spreads have come in,' Mr Batey said. 'I think this signifies that a lot of these concerns are going away.'
