Salient to Investors:

Owi Ruivivar at Goldman Sachs Asset Mgmt said:

  • If surging demand continues for Asian bonds and distorts prices for a long period of time, the likelihood of asset bubbles increases because prices do not fully reflect economic fundamentals.
  • Supply and demand have become the dominant drivers of bond valuations rather than economic fundamentals
  • Asia’s resilience during the global financial crisis is a big factor attracting overseas bond investors.
  • If the zero real interest rate environment continues, investors will look for higher yields and all fixed income yields will move even lower.

EPFR Global said bond funds in emerging Asia took in a net $11.45 billion in 2012 versus $6.2 billion for the whole of 2011. HSBC said yields on local currency debt fell to a record low.

Desmond Soon at Western Asset Mgmt said 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. Soon said that before Lehman Brothers, there were many more dollar spread products such as mortgage-backed securities and commercial mortgage-backed securities, but these have all fallen away or ended up in the balance sheet of the Fed – in reality the universe for dollar spread investors has shrunk dramatically compared to before 2008.

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