Contraction may continue as demand for fixed-income assets exceeds supply
China's decision last week to allow insurers to invest 80 per cent of their foreign currency holdings abroad is unlikely to have much direct impact on Asian bond spreads as most of the money will probably find its way into investment grade United States or European debt, analysts say.
Still, some of it may be invested in familiar names closer to home and will add to the already large pool of Asian-generated liquidity that is vying for fixed-income assets in the region. That demand - sometimes called the 'Asian bid' - far outweighs the amount of supply this year and is a key reason why the current spread tightening trend should have a bit further to go, some observers say.
Last week's issues from Singapore's United Overseas Bank and South Korean refiner LG Caltex supported that view. Even in the holiday-thin market, LG Caltex's relaunched US$300 million bond attracted more than $2 billion worth of demand, while the $1 billion tranche of UOB's dual currency offer was said to have drawn $2.5 billion worth of orders.
'We think it is possible for spreads to get tighter from here, just because there is so much demand,' said Timothy Matson, the regional head of fixed income at ING Investment Management.
'There is still a lot of cash in Asia in general, and in the US and Europe, insurers and banks still have plenty of money to invest. At the same time, there is not much supply coming out as a lot of corporations have cash on their balance sheets and want to keep their leverage under control.'
Since the end of June, Asian spreads, or the yield difference between Asian bonds and US treasuries, have tightened by an average 10 to 15 basis points as measured by the JP Morgan Asia Credit Index.
