China has dominated the Asian US dollar bond market
China’s share of the Asian US dollar bond market has grown rapidly since 2010, as shown in Figure 1. Including Hong Kong, Greater China now accounts for 63% of outstanding bonds in the Asian US dollar bond space. Given China’s dominance in the market, both the valuation and technical factors of the Asian US dollar bond market are increasingly affected by Chinese policies, the supply and demand dynamics of Chinese US dollar bonds, and to a certain extent, the yield differentials between China’s US dollar bond market and its onshore renminbi bond market on a currency swap basis. For example, the large offshore versus onshore yield differentials of Chinese high yield bonds (Figure 23), present incentives for Chinese investors to buy Chinese US dollar denominated high yield bonds. The relative attractiveness of Chinese US dollar high yield bonds may also drive the performance of high yield bonds of other Asian countries. In-depth macroeconomic research on China, systematic investment processes with respect to the onshore renminbi bond market and an understanding of local Chinese investor behavior have become important elements of Asian US dollar bond investing.
Attractive risk-reward profiles amid high domestic savings
High rates of domestic savings across most Asian countries have led to strong demand for Asian US dollar bonds among Asian investors, the so-called phenomenon of the “Asian bid.” Figure 3 shows that Asian investors have purchased over 70% of Asian US dollar bond new issues since 2016. The so-called Asian bid is diverse, representing Asian insurance companies, banks, private bank investors and retail investors, but their shared demand appears to be based on their familiarity with Asian bond issuers and a “home bias.” We believe this source of demand has contributed to lower volatility of the Asian US dollar bond market compared to other major bond markets, as shown in Figures 4-7.