Fixed-income trading volume in Asia grew three-fold from 2001 to 2004, and fixed-income assets under management by Asian investors soared some 65% over the past 12 months, Greenwich Associates said in a report.
With this growth, electronic trading gained converts among Asian fixed-income investors in 2004 and e-trading usage rates in the region have surpassed those of Japan. However, the adoption of e-trading by Asian investors still lags far behind that of the United States and Europe because of the more fragmented nature of the market.
In Asia, 17% of investors in G-7 government bonds traded these securities electronically in 2004. These e-traders executed nearly a quarter of their government securities trade volume electronically. While the 17% e-trading usage rate represents a solid increase from the 10% of government bond investors trading electronically in 2003, usage still trails that of the United States, where 64% of U.S. government bond investors trade electronically, and Europe, where 46% of government bond investors are also e-traders. Asian usage does top that of Japan, where less than one-in-10 government bond investors traded electronically in 2004.
Overall, the strong and consistent growth points in Asian fixed-income markets point to a market that is increasingly diverse, liquid and sophisticated. Fixed-income investors in Asia have reaped the benefits of favorable market conditions in recent years, but new Greenwich Associates research reveals several trends suggesting that Asian fixed-income investors are better prepared than ever before to weather a period of rising interest rates.
Among these trends, Greenwich Associates says domestic fixed-income markets denominated in local currencies continue to attract investors and liquidity. Among non-central bank investors, local currency bonds now make up more than half of all fixed-income trade volume and are rapidly evolving into a critical component of Asia’s capital markets.
Additionally, Asian fixed-income investors are moving away from a generalist outlook in favor of a more specialized model in which they are segmenting product lines internally, increasing in-house staffing to build product expertise and demanding and rewarding their dealers for specialist sales coverage.
Further, Asian investors have begun to widely employ complex instruments including credit derivatives and interest-rate derivatives. The increasing popularity of these instruments is reflected in the growing number of institutional investors who report using them in some capacity, as well as in rising trade volumes.
“It has not been much of a challenge to make money in fixed income over the past few years,” says Greenwich Associates consultant Tim Sangston. “Looking at the markets today, however, there are some serious questions as to whether such favorable conditions will persist. The good news for Asian investors is that they are adopting an increasingly sophisticated approach to fixed income and are thus better equipped to deal with a tough market than they would have been in even the very recent past.”