Investors seek out riskier bonds in Asia amid low interest rates

After US central bank signalled interest rates will stay low for longer, investors have sought out longer tenor, perpetual bonds

Issuance of longer tenor bonds has tripled year on year to US$28.6 billion

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Published: 3:30pm, 23 Jul 2020Updated: 12:28pm, 27 Jul 2020

Corrected [12:14pm, 27 Jul, 2020]

[12:14pm, 27 Jul, 2020]
Corrects the title of ANZ banker in the 13th paragraph

After the US Federal Reserve said in April that it would keep interest rates ultra-low until at least 2022, investors have been snapping up bonds that do not pay back for 40, 50 years or even forever, in their search for higher-yielding investments.

During the first half of this year, companies spanning Asia excluding Japan have issued US$28.6 billion worth of bonds with tenors of 30-years and beyond, tripling from a year ago. In May, Chinese social media giant Tencent issued its inaugural 40-year US$750 million bond paying 3.29 per cent coupon. Conglomerate CK Hutchison raised US$750 million 30-year bond paying 3.375 per cent coupon, also issued in May.

“Long tenor bonds of stable investment-grade corporates are attractive against the backdrop of interest rates being ‘lower for longer’,” said Leong Wai-mei, a fixed income portfolio manager at Eastspring Investments, the asset management arm of Prudential Corporate Asia.

The surge in issuance means the region’s companies have locked in more firepower to combat successive waves of the coronavirus, investors have access to higher-yielding products even if they are riskier, and advisory firms are raking in fees for handling the deals.

US Federal Reserve keeping interest rates low. Photo: AFP

The riskier end of the bond spectrum used to mostly attract private banking clients, but the investor base is broadening out to include a wider array of asset managers and insurance companies.

The risks should not be ignored. Perpetual bonds’ coupons are fixed for the bond’s life: when interest rates start to pick up an issuer is incentivised to not call back the bond as higher rates would make refinancing its debt costlier. In February last year Banco Santander shocked investors when it opted not to call its €1.5 billion (US$1.7 billion) contingent convertible perpetual bond.