Outlook for Asian dollar bonds turns bleak in 2004

Asian dollar bond investors pocketed high single-digit gains in 2003, but the going may be tough next year as regional spreads are likely to be threatened by slowing growth in China, high oil prices and election-related political risks.
Bonds spreads were unmoved in early regional trade on Wednesday as trading came to a near standstill, with most investors away on year-end holidays.
Asian dollar bonds delivered about 8.5 percent in total returns to investors in 2003, according to the widely watched J.P. Morgan Asia Credit Index.
HSBC in a research report said that Asia's year-long credit rally was largely over and that investors will have to position themselves carefully between fundamental, technical and value drivers to achieve steady returns in 2004.
"In Asia, slowing growth in China, the largely negative effect of high oil prices on economic growth and the overhang of political risks as elections draw near, pose risks to spreads," HSBC said.
Seven countries in the region will have elections next year.
Dealers said a turnaround in regional equity markets has led many investors to allocate money away from bonds into equities.
This, along with anticipated higher regional economic growth and improvement in loan growth at Asian banks, could lead to reduced demand for Asian dollar bonds.
Asian financial institutions and banks, flooded with idle cash in their vaults due to low demand for loans, have been a key source of support for regional dollar bonds in the past three years.
Dealers also expect regional dollar bond spreads to come under pressure in the first quarter from planned bond sales.
At least US $4.5 billion of dollar denominated debt could be issued out of emerging Asia in the first quarter of next year and another US $10 billion to US $11 billion in the second quarter.
Meanwhile, state-run Korea Development Bank (KDB) filed with the US Securities and Exchange Commission to periodically sell up to US $3 billion in debt securities, a company official said.
KDB said it planned to use the proceeds from the shelf offering, filed on Tuesday, for general operations. Under a shelf registration, a company may sell securities in one or more separate offerings with the size, price and terms to be determined at the time of the sale.
KDB is a frequent visitor to the international capital markets.