Debt Buyers Who Snapped Up $10 Billion Monthly May Make Comeback

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(Bloomberg) -- Corporate-bond issuers don’t despair: there’s a well of cash in Asia and it still wants your debt.

That’s the message from strategists at Goldman Sachs Group Inc. and Bank of America Merrill Lynch. Goldman estimates that investors in Asian emerging markets accounted for $10 billion to $20 billion of net monthly credit purchases over the past two years, and after their enthusiasm cooled in recent months they are poised to return.

“Despite the near-term weakness, we believe that longer-term technical support remains firm,” strategist Kenneth Ho wrote in a note published Thursday. “The main driver of this is the aging demographics in EM Asia economies over the next decade, in particular China, Hong Kong, Singapore, Korea and Taiwan.”

Dwindling appetite from usually stalwart Asian buyers, who have gobbled up dollar-denominated securities close to home in recent years, has coincided with the steepest first-quarter losses on a Merrill Lynch gauge of global credit since 2009. Concern about economic momentum, excessive leverage, and tighter financial conditions have driven the declines, and a volatile U.S. dollar and higher currency hedging costs have compounded the bleak picture.

Developed Asia -- namely Japan -- is also increasing exposure to European debt, according to Bank of America strategists including Barnaby Martin. That includes purchases of corporate bonds by life insurance companies.

For these safety-seeking investors, European assets might even come to supplant the place of American government bonds as havens, Martin and his team wrote in a note also published Thursday.

“Large future deficits, Fed balance sheet shrinkage, rising policy uncertainty and the emergence of ‘cash’ as an asset class in the U.S. all pose medium-term headwinds to the performance of U.S. Treasury debt,” according to Martin. “Haven characteristics of euro fixed-income have been improving of late” just as the safety appeal of U.S debt wanes, he said.

©2018 Bloomberg L.P.

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