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Asia’s Bond Market Bubbling as Investors Chase Yields

The bond market in Asia has been in a sweet spot this year, with a record level of corporate debt being issued matched by robust demand from global investors chasing yield.

Foreign currency bond issuance in the region surpassed the $100 billion mark for the first time ever in a year in September, and is expected to hit $130 billion by the end of 2012. Emerging market bond funds, meantime, have attracted a steady stream of investments, with 22 straight weeks of net inflows, according to fund flow monitor EPFR.

Despite this strong performance, experts point to some red flags that are fueling concerns about a likely bubble forming in this fast growing space. Multi-year low bond yields, poor asset quality and rising investor leverage are some risk factors that have people worried.

“We worry about a potential bond bubble (in emerging market corporate debt), and that these returns and flows could reverse at some point,” Michael Hartnett, chief investment strategist at Bank of America Merill Lynch, wrote in a report.

Bond yields, which move in the opposite direction to prices, have fallen sharply over the last 12 months. The benchmark J.P. Morgan Asia Credit Index (JACI), which tracks the performance of U.S. dollar-denominated bonds in Asia, currently yields around 4 percent, compared to 6.1 percent a year ago, and breaching 2011’s low of 4.65 percent, according to the bank.

Yields last fell to the 4 percent level in 2010 when risk aversion, due to worries over the outlook for the U.S. economy, sent investors flocking to the safety of bonds.

“The yield on J.P. Morgan Asia Credit Index, which is near historical lows, suggests the credit market is becoming overvalued,” said Manpreet Gill, senior investment strategist at Standard Chartered. “Prices of bonds are unlikely to move much higher as there isn’t a huge amount of value anymore,” he added.

Additionally, the yield spread – or the difference in yield – between Asian corporate debt and U.S. Treasury bonds, which are considered to be risk-free, has also been narrowing. The spread between the JACI and U.S. Treasurys is 260 basis points, compared to 360 basis points in November 2011, according to J.P. Morgan.

Via – CNBC [1]

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