Turmoil in global credit markets is taking its toll on Asias emerging domestic bond markets, according to the results of the most recent Greenwich Associates Asian Fixed Income Research Study.
Asian domestic bond markets grew at a furious pace in the years leading up to the current global financial crisis. Trading volumes in the domestic currency bond markets of countries like China, Indonesia, Malaysia, India, Thailand and Australia/New Zealand increased more than 135% from 2006 to 2007 alone. As a result of this expansion, local-currency products grew to make up over 50% of overall fixed-income trading volume across Asia in 2006-2007, up from just 30% the year before.
The onset of the global credit crisis stopped this growth in its tracks over the past year as local currency bond markets in many major Asian countries experienced severe retrenchment.
Domestic currency fixed-income trading volume fell some 47% in India and contracted by about one third in China and Australia/New Zealand. These declines shrunk local-currency business to less than a third of total Asian fixed-income trading volume from 2007 to 2008.
The development of these markets represented a profound shift for Asian financial markets, says Tim Sangston, Greenwich Associates consultant. In the past, large Asian companies that earned most of their revenues in local currency had to obtain most of their long-term financing in dollars or European currencies which history has proven is a dangerous position to be in. The emergence of thriving local-currency debt markets has been seen as an important new source of stability, but the severity of the current financial crisis leaves the near-term fate of these markets in real doubt.
Despite the contraction in domestic markets or perhaps because of it to some extent overall Asian fixed-income trading volume (including derivatives) among investors interviewed by Greenwich Associates increased 35% to $2.3 trillion in 2007-2008. Trading volume in cash bonds was up 15%.
Much of that growth came about as a result of a surge of activity among institutions in Asian bonds denominated in the currencies of G-3 and G-7 countries, in which trading volumes doubled from 2007-2008.
Asian institutional trading volumes in G-3 denominated Asian bonds soared 90% to $214 billion in 20072008. Fueling that growth was a dramatic spike in activity in G-3 denominated investment-grade sovereign/corporate issues, in which trading volume increased nearly four-fold, and in G-3 high-yield bonds, in which trading volumes more than tripled.
Overall trading volume in investment-grade credit products issued by companies in G-7 countries increased to $163 billion among Asian institutions in 20072008, up 55% from the prior year. Much of that growth occurred in G-7 credit default swaps and index products, in which trading volume tripled year-over-year. Trading volumes in interest-rate derivatives also skyrocketed among Asian institutions, more than doubling to $722 billion.
Retrenchment in domestic Asian bond markets is having a significant impact on the fortunes of the major broker-dealers competing for the fixed-income trading business of Asian institutions. In short: Dealers that have invested heavily to build a presence in local currency bond markets are feeling some real pain.
As part of its 2008 Asian Fixed-Income Investors Study, Greenwich asked nearly 770 institutional investors to name the dealers they use for their fixed-income trading business, to specify how much of their total trading business they allocate to each dealer in specific products and to rate the quality of service each dealer delivers. Based on the results of this research, Greenwich Associates compiles its Dealer Market Share Rankings, and identifies the Greenwich Quality Leaders for Asian Fixed-Income. HSBC rose to the top of Greenwich Associates Asian
Fixed Income Dealer Rankings in 2007-2008 with a 12.1% market share in overall trading. Citigroup ranked second in this years rankings with 9.6% market share in Asian fixed-income trading, followed by Deutsche Bank at a 9.3% share.
It is interesting to note that among all the major dealers competing in Asia, HSBC has built the biggest trading franchise in local-currency products, says Tim Sangston. But the banks strength in other areas and its market-leading scores for overall franchise quality over the course of the credit crisis have enabled it to weather the storm in Asia to this point.
One reason for HSBCs strong performance last year was its significant improvement in the Greenwich Associates Quality Index scores. Also notching impressive gains in quality scores was J.P. Morgan, which jumped to second place in 2008 in Greenwich Associates Quality Rankings.
D.C.