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Playing Defense with Asian Debt 

David Tan 



CIO Fixed Income Asia Pacific David Tan discusses the changing perception of Asia's sovereign debt market and how it has emerged as a "safe haven" for investors.
Virgil's ancient words that "the only safety for the conquered is to expect no safety" underscore a timeless polar relationship between risk and safety that applies to the present. Investors in Asian local currency government bonds who have been transfixed into inactivity by past crises may find recent changes to be a liberating catalyst, providing action points for Asian fixed income.

Systemic risks have generally led to a global drop in prices of risky assets – as evidenced in the 1997 Asian financial crisis, the 2008 financial crisis and the recent "risk on/risk off" ("RORO") periods of 2010. Historically, systemic risks have also led to market spikes – most popularly measured by the VIX³ – and to rising prices of US Treasuries and German bunds as investors flee to these safe havens.

But the perception of Asian fixed income as “emerging” or "risky" began to change as the nature of the crisis moved from "financial" to "sovereign" when developed governments started to bail out their banks by turning on the printing presses. As a result, Asian fixed income has more recently behaved like safe-haven assets in risk-off periods.

Consider that during the financial crisis of 2008, when the VIX spiked up to near 80, Asian bond yields rose with the VIX while US Treasury yields declined in a flight to quality by investors.

In 2010, with constant RORO volatility resulting from European headline news, US Treasury yields declined yet again, as expected, on flight-to-quality trades. What was notably different in 2010 was that yields of Asian bonds also declined during this period, suggesting a change of attitude. This shift in risksafety poles can be explained by strong fundamentals.

Asia is, comparatively, one of the world's fastest-growing regions, surpassing developed economies. According to the IMF4:

Developing Asia will grow approximately 7 per cent for 2013 and 2014.
The ASEAN-55 will grow around 5.9 per cent in 2013 and 5.5 per cent in 2014 – much higher than the growth in Asia's advanced economies of 1.2 per cent in 2013 and 2.2 per cent in 2014.

Asian countries' sovereign debt as a percentage of gross domestic product (GDP) is much lower on average than that of developed nations. Debt and fiscal positions are also a lot stronger relative to a high number of Asian countries rated as investment grade. In addition, Asian countries' debt, as a percentage of GDP, is comparatively lower on average.

Moreover, Asia recovered from the financial crisis, going from strength to strength, to become a region with strong accumulated foreign exchange (FX) reserves. The ability to defend potential currency attacks or crises bodes well for Asian currencies in general. In addition, pension funds and sovereign wealth funds are buying Asian bonds, and central banks are diversifying their FX reserves into Asian fixed income.

Given these many strong fundamentals, Asian fixed income is increasingly being perceived as a "safe haven" and gradually being accepted by investors globally as a source of diversification away from the structural problems of developed nations. We believe this change in the risk-safety mindset about Asian fixed income warrants some consideration.

A Word About Risk: Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. Bond prices will normally decline as interest rates rise. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal.

1 Bank of England
2 Bank of China
3 CBOE SPX Volatility Index
4 International Monetary Fund World Economic Outlook, April 2013
5 Association of Southeast Asian Nations (Indonesia, Malaysia, Philippines, Thailand, Vietnam)

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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