* Inflation-linked debt issuance surges in Asia on demand
from pension funds
* Asian governments keen to diversify their investor bases
* Pension funds typically allocate 5-10 pct to
By Cecile Lefort
SYDNEY, Nov 4 (Reuters) - Asian governments as far apart as
India and New Zealand have discovered there is huge investor
appetite for inflation-protected debt despite a subdued outlook
for global inflation.
Drawn by strong demand,India launched its debut issue, while
Thailand, Hong Kong, Australia, New Zealand and Japan all sold
fresh issues this year.
Sales, according to Reuters calculations, have surged to
more than $9 billion since January, up 50 percent from the year
before and are in stark contrast from five years ago when
inflation-linked debt issuance was negligible.
India is expected to launch another second before Christmas,
and the Philippines is widely seen making its debut next year.
Singapore has also mulled coming to the market and investors
speculate that China and Indonesia will follow suit in coming
Inflation-linked bonds, or linkers, provide a hedge against
rising prices by offering a return linked to inflation. Pension
funds are natural buyers, as they typically have tenors of more
than 10 years that match pension funds' long-term liabilities.
While pension funds and life insurers are buying Asian
linkers, they are mainly from developed markets outside of Asia,
so it is not a fear of rising prices that is driving demand, as
the inflation outlook in most developed markets is benign.
"Global inflation will remain relatively subdued because you
don't get that huge pump up in consumer demand that people had
been hoping for as a result of the U.S. Federal Reserves'
monetary stimulus," said Desmond Fu, rates analyst at fund
management firm Western Asset in Singapore, seeing a low
inflationary threat next year in developed markets.
With more than $80 billion on issue in Asia-Pacific, linkers
are fast growing in popularity, though they are dwarfed by the
United States' $800 billion and Britain's $450 billion, where
markets have been active since the 1980s.
"I can't imagine issuance decreasing," Philippe Laroche,
global head, inflation debt capital markets, at HSBC in Paris.
"Almost every year new countries are joining this market and
others are upsizing their funding allocated to linkers. Issuance
is set to grow."
Factors behind the surge in inflation-linked issuance varies
greatly from country to country.
Diversification is an issue for investors and issuers alike.
Pension funds typically allocate 5 to 10 percent of their
portfolios to inflation-protected debt so investors in countries
such as Australia, which has $1.3 trillion in retirement
savings, are always looking for new things to invest in.
Issuing governments, likewise, are keen to diversify their
Emerging economies, such as Thailand and the Philippines,
see the strong demand for linkers as an opportunity to develop
their fledgling capital markets.
Persistent inflation pressures, however, are behind the
issuance and demand for inflation-linked bonds in countries such
as India and Hong Kong.
Rohit Arora, a rates strategist at Barclays in Singapore
said that Indian policymakers wanted to use inflation-linked
bonds as a way of weaning retail investors off gold and real
Many Indians buy gold as a hedge against rising living
costs, putting pressure on India's current account as gold
accounts for 10 percent of total imports, and is the second
biggest item on its import bill after oil.
In the more established markets of Australia and New
Zealand, investor demand drives sales of linkers because of the
countries' high debt ratings.
"The beauty of Australia and New Zealand is that they have
relatively healthy growth with attractive real yields," said
(Reporting by Cecile Lefort; Editing by Nachum Kaplan and Simon