THE GLOBALIZATION OF BOND MARKETS

The fixed income market is redefining itself on a global stage. Enter the next generation: Fixed Income 2.0, a more transparent and level playing field than ever before for this asset class. In SIGHTS recently sat down with J.R. Rieger, Global Head of Fixed Income at S&P DJI, to discuss effectively navigating the globalization of bonds and its potential implications on investor holdings. FIXED INCOME 2.0 THE GLOBALIZATION OF BOND MARKETS INTERVIEW BY THERESA BAGGS In SIGHTS: Why are we seeing a shift in attention to global fixed income? J.R. : It’s a combination of two key factors and their effects on the market. The first is an extended period of quantitative easing that has pushed yield down in the U.S. The second is periods of risk on/ risk off seen across various regions around the world, like unrest in Greece and Ukraine, which are driving volatility in the equity and commodities markets. 

Plain and simple, investors are turning to fixed income as a solution because its cash flow and returns have been historically less volatile than other asset classes. In addition, we see a hunger for securities that have higher yield than what is available in U.S. markets. With rates at record lows in the U.S., some investors have abandoned their usual “comfort zone,” opting to venture outside of the domestic market and into higher yielding countries, like Australia and New Zealand, and into even lower credit quality bonds from the emerging market countries in their hunt for yield. This is what we call the globalization of bond markets. In SIGHTS: What regions are most prominently catching on to this trend? J.R. : U.S. and European investors have a particular interest in China fixed income because China has opened its doors after all these years to foreign investment. Global investors are attracted to China’s onshore bond market because they have access to quality instruments at a yield that is not readily available at that quality in other markets, and the currency risk in China is less volatile than in other countries. 

Also sought after, and more readily available to foreign investors, are dim sum bonds, which are denominated in Chinese renminbi but are issued in Hong Kong or other markets outside of mainland China, allowing foreign investors an easier way to gain exposure to Chinese credit and currency risk. Sukuk bonds comply with Shariah (Islamic) law, and they are a fast-growing asset class in Asia. The ETF market, while more advanced in the U.S. and Europe, is still in its infancy across Asia and Latin America. The ETF market is quickly catching on to these markets, as investors see the appeal of ETFs as a transparent way to access bond market diversification at a low cost. For instance, Mexican legislative changes have categorized fixed income ETFs as “look-through” instruments to resolve pressures on capital solvency requirements and generally favor adoption of fixed income ETFs in insurance portfolios. Demand can also be very telling. We’re seeing investor interest in frontier markets such as Africa and the Middle East. India, in particular, has experienced a great deal of attention, and it is expected to be the world’s next fastest-growing economy, surpassing China. But there are tax consequences that make investments in India complex. Until India fits into a more global market model, it will be difficult for those bonds to trade freely on a global scale.