Sales of Asian linkers surge despite tame inflation outlook

Last Updated: Mon, Nov 04, 2013 04:40 hrs

* 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 inflation-protected debt

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 years.

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 investor base.

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 estate assets.

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 HSBC's Laroche. (Reporting by Cecile Lefort; Editing by Nachum Kaplan and Simon Cameron-Moore)

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