Japan, Taiwan Singapore and Hong Kong are displacing China’s once insatiable appetite for foreign bond purchases but risks loom for income investors in the low yield environment.
The quartet of east Asian economies bought $330 billion of foreign bonds in the first nine months of 2019, according to an Oxford Economics research note. This pace mirrors that of China’s heydays in 2006-08 and the group is estimated to up purchases to $400 billion this year.
The report notes that the surge is markedly different as it isn’t driven by an overall increase in capital outflows but rather a «recomposition of outflows towards bonds». Rapidly growing demand for higher yields abroad has led regulators in markets such as Japan and Taiwan to limit domestic fund managers’ foreign investments.
Risk Build-Up
East Asian investors' foreign bond appetite is expected to further depress developed market yields and sap the global pool of risk-free assets. The short-term effects to portfolio returns aside, Oxford Economics warned of bubbling risks from this scale of increases to cross-border exposure.
«The increase in cross-border portfolio allocation might create a further buildup of vulnerabilities, especially among some Asian pension funds and life insurers,» said Guillermo Tolosa and Giuliano Simoncelli in a note from the research group.
