BLBG:Goldman Sachs Says Asian Bond Demand Surge May Cause Bubble
Asia’s bond market is facing a possible bubble that could “destabilize economies where fundamentals are poor” after capital inflows surged this year, according to Goldman Sachs Asset Management Co.
Bond funds in emerging Asia took in a net $11.45 billion this year as of Oct. 31, an 85 percent increase from $6.2 billion for the whole of 2011, according to EPFR Global. Yield premiums on Asia’s BBB rated sovereign bonds have fallen 71 basis points this half to 173 basis points more than Treasuries as of Nov. 14, compared with a 52 basis point slide to 164 for similar-rated countries globally.
“If bond demand continues at these levels and distorts prices for a long period of time, the likelihood of asset bubbles increases,” said Singapore-based Owi Ruivivar, senior fixed income portfolio manager at Goldman’s asset management firm. “The main issue with this increased flow of funds chasing emerging market bonds is that prices do not fully reflect economic fundamentals.”
Dollar- and local currency-denominated bond offerings in Asia surged to records this year as low interest rates in the U.S. and Europe heightened the appeal of the higher-yielding assets. Investors are demanding less of a premium for dollar notes in Asia even as the region’s growth is likely to slow to 5.4 percent this year from 5.8 percent in 2011, according to the International Monetary Fund. Yields on local currency debt fell to a record low of 3.56 percent on Nov. 13, according to HSBC Holdings Plc indexes.
Spreads on dollar bonds in Asia fell 128 basis points this year to 247.2 basis points more than Treasuries on Oct. 19, the lowest since since April 2010, HSBC Indexes show.
Yields Lower
Offerings from Asia outside Japan of $113.4 billion this year have eclipsed the previous annual record of $73.3 billion in 2010, according to data compiled by Bloomberg. Local currency bond sales are at the equivalent of $203.9 billion this year, surpassing the previous record of $195.7 billion in 2011.
Debt-buying schemes by the U.S. Federal Reserve and the European Central Bank in September to support the economy have caused yield premiums to tighten, triggering a surge in issuance. The U.S. central bank said at the time that it will probably hold the federal-funds rate near zero until at least mid-2015.
“If an environment with no real interest rates continues, investors will look for higher yields, which will push yields in the entire fixed-income complex even lower,” said Ruivivar.
Lacking Products
The influx into fixed income, particularly in emerging markets including in Asia, is understandable due to the dearth of investment opportunities in higher-yielding products, according to Desmond Soon, Singapore-based senior portfolio manager at Western Asset Management.
Global sales of debt backed by commercial loans has fallen to $121.2 billion from a record $335 billion in 2007, Bloomberg data show.
“Before Lehman Brothers, there were a lot more dollar spread products to invest in such as mortgage-backed securities and commercial mortgage backed securities,” Soon said. “These have all fallen away or ended up on the Fed’s balance sheet. So, while we are seeing record bond issuance, the reality is that the universe for dollar investors has shrunk dramatically after 2008.”
To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net
To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net
