Asian bond boom set to continue on regional growth

Booming Asian bond markets have outperformed their global peers for more than a decade, with investors riding a wave of solid economic growth and steady financial market reform.

The trend is set to continue, transforming the region's bonds from being a niche choice for emerging market investors to mainstream holdings for fixed-income funds worldwide.

The changes have been dramatic over the past 15 years. The most obvious is the shift in the size of the market.

The sum of all domestic Asian bond markets (excluding Japan but including India) is now about US$9.5 trillion, up from just over US$500 billion at the start of the new millennium - an annualised increase of 25 per cent - largely been driven by the growth in the region's economies.

According to the International Monetary Fund, the Asian economies that make up the major bond issuers in the region have quadrupled in size since 2000, increasing their contribution to global gross domestic product to about 30 per cent from 20 per cent 15 years ago.

But this alone does not explain the nearly 20-fold increase in the size of the bond markets. Clearly some of the growth is down to the low base that Asian capital markets were starting from and the structural changes in financing channels that were required in the wake of the 1997-98 Asian financial crisis.

Back then many Asian economies were "over-banked" and there was a substantial need to disintermediate banking systems and encourage a proper credit-creation mechanism. The first step in this process was to develop a deep and liquid government bond market, and this then gave issuers a benchmark against which to price their bonds.