Debt capital market set to pick up in 2024, driven by strong Asian fundamentals

DEMAND for bonds will continue to remain strong, owing to the higher-than-normal base interest rates set by the US Federal Reserve. 

“There’s talk of rates being eased off next year, but we don’t see it coming down very, very rapidly,” said Clifford Lee, DBS’ global head of fixed income. 

Coupled with an air of uncertainty going into 2024, this could result in what Lee calls a “lack of conviction” from investors, as they mull investment decisions and strategies. “So what do you do while you think? You park it in bonds,” he said. 

2023 has been a muted year for the debt capital market. Market volume from Asia excluding Japan bonds denominated in US dollars, euros and yen (Asia ex-Japan G3) fell almost 20 per cent year on year, according to Bloomberg data. 

Meanwhile, Singapore’s debt capital market activity in the first nine months of 2023 fell 28 per cent year on year to a total of US$16.7 billion, according to data from Refinitiv, which is now known as LSEG Data & Analytics. 

This was in part due to a drop in offshore issuance from Chinese firms due to China’s quantitative easing policies, which made up a majority of Asia’s primary market, said Lee, as well as global headwinds.

The withdrawal of Chinese property developers – a key segment that drove growth in the region’s high-yield market over the last decade – also contributed to fewer debt issuances here, analysts noted in a HSBC report in August.  

But activity in the market picked up towards the tail end of the year, on the back of improved market sentiment and a close to 75-basis-point rally in US treasuries, said Nitesh Dugar, head of South and South-east Asia debt capital markets at Citi. 

He observed that repeat issuers, such as BOC Aviation, continued to receive good demand for its paper, while other well-known names such as Bangkok Bank, DBS, Bank Mandiri and Kasikornbank also completed successful issuances.

Demand has been consistently strong this year, both in Singapore and within the region.

Singapore’s government-issued bonds, such as T-bills, have drawn strong interest this year, after yields crossed the 4-per-cent mark in January and September. Bid-to-cover ratios on the previous few tranches were more than two times the bond size. 

Others in the region, such as in Indonesia and the Philippines, continued to tap the sukuk bond market to seek out investors, said Dugar. 

Joevin Teo, head of Asian fixed income at Amundi, noted that strong fundamentals, a stable inflation outlook and healthy corporate earnings boosted investor confidence within Asia. 

“Yields are at their highest levels in several years,” he said. “So this actually offers investors a very good opportunity to achieve a good level of total returns over time.”

Teo believes a bright spot within the market could come from India. 

“There is the Indian election next year, which markets are closely watching, but India has done (its) fiscal consolidation, (so) the following year is expected to be stable,” he said.

His views were echoed by DBS’ Lee, who foresees more infrastructure funding needs to come from India in order to accommodate the economic interests that have moved there from China. 

Sector-wise, market watchers expect more issuances to come from sovereigns and financial institutions next year. 

“We are seeing a strong pipeline for 2024, led primarily by sovereigns, state-owned enterprises and financial institutions, to tap the market at the start of the year as they look to address their upcoming maturities as well as fund new projects,” said Citi’s Dugar. 

“Corporates may tap the markets subsequently, depending on their capex requirement, strategic mergers and acquisitions needs, and availability of liquidity in domestic markets,” he added. 

Among them, the market for green, sustainable bonds is a “fast-growing segment which cannot be ignored”, said Amundi’s Teo.  

He noted that more than half of the total issuances in the segment this year have been issued out of Asia. 

“The amount of investor interest in the market is increasing, the amount of issuance in this market is (also) increasing.

“Corporates, and even issuers, that do not align themselves with these principles can potentially find themselves with fewer funding sources from investors,” he added.