Asian fixed-income markets are being transformed by three powerful and interrelated trends: The growth of investment in local currency bonds, the rise of regional dealers and the accelerating expansion of e-trading.
These shifts in Asian bond markets began in 1997 when a credit crisis provoked devaluations, insolvencies, and government and IMF interventions. In response to that event, Asian countries including Japan, China and South Korea launched the 2002 Asian Bond Market Initiative (ABMI), which was intended to strengthen financial stability and reduce the region’s vulnerability to the sudden reversal of capital flows.
A new Greenwich Report, Asian Fixed-Income E-Trading: Asian Banks Use Global Tools to Accelerate Regional Growth, traces how that effort led to the powerful growth trends in local currency bonds, regional dealers and e-trading that are reshaping Asian fixed income.
Booming Local Currency Bonds
One of the major positive outcomes of the ABMI has been the build-out of local Asian bond markets. Local currency bond markets have seen significant growth across the region, with barely a blip during the 2008 crisis. In 2017, local currency issuance in Asia was $1.5 trillion vs. G3-denominated issuance of $412 billion.
Rise of Regional Dealers
In tandem with, and partially as a result of the growth in local currency bond markets, regional dealers are claiming a growing share of the Asian market. Although global dealers continue to dominate in G3-denominated assets, local banks have tripled their market share in both corporates and sovereigns, from just over 3% in 2013 to more than 10% in 2018.
In domestic currencies, regional banks have overtaken the global dealers and now have over 50% share in both markets. Across Asia, regional dealer share rose from 59% to 72% in local currency corporates, from 41% to 59% in sovereigns and overall from 47% to 66% from 2013 to 2018.
“These trends can vary significantly in individual countries, but across the region the trend is clear: Regional dealers are a powerful force in local markets,” says Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of the new report.
Electronic Trading Expansion and the Adoption of All-to-All Trading
Greenwich Associates data show a clear acceleration of e-trading across the past three years, climbing from 14% of overall nominal Asian fixed-income trading volume in 2016 to 30% in 2018. Reflecting the diversity of the region, e-trading adoption varies significantly from country to country. Some markets have exchange trading of bonds and others have their own e-marketplaces. Additionally, global e-trading platforms compete actively across the region, bringing with them globally uniform protocols and best practices. Regional dealers are using e-trading to achieve scale locally and connect with counterparties across the region and around the world.
In addition to using e-trading platforms generally, including Bloomberg, MarketAxess and Tradeweb, Asian regional dealers are specifically leveraging all-to-all trading technology to expand their reach. Global dealers provide liquidity to their clients over the bilateral, disclosed dealer-to-client networks. By contrast, over a third of Asian regional dealers who are clients of MarketAxess are Open Trading-only clients —not the bilateral protocols—and use it to provide liquidity to firms with whom they do not have direct relationships, a major benefit of the all-to-all protocol.
“In addition to permitting buy-side firms to trade with one another as it does in other regions, Open Trading is enabling regional dealers to provide liquidity to firms beyond the reach of their traditional relationships as they gain market share and seek to stand shoulder to shoulder with the global dealers,” says Ken Monahan.
