Background:

At MarketAxess, I wrote an article to provide a data-driven outlook of the APAC fixed income markets for 2024. This piece examines the economic undercurrents of 2023, compares industry trends against trading activity on MarketAxess' platform, and predicts what we can expect in 2024.

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Published 5 February 2024 here

What 2024 taught us about the APAC fixed income markets

IAs we navigate the early days of 2024, it's helpful to take stock of the year gone by—a year that was replete with global events and policy decisions that have left an indelible mark on the Asia-Pacific bond markets. Let’s delve into the economic undercurrents of 2023 and cast an eye towards what we might expect in the year ahead.

The macro drivers of 2023 and their legacy

Last year was a testament to the unpredictability of  the forces that drive macroeconomics. The Federal Reserve's policy rates were a constant source of speculation, with the consensus being that a turn might occur around mid-2024. Yet, as history has shown, the market forecasts have often missed the mark.

Europe grappled with inflation more severely than the US, hinting that the European Central Bank may not mirror the Fed's actions in the coming year. The divergence in monetary policies across the globe was stark, with Western economies tightening their belts while Eastern counterparts remained more accommodative.

Asia-Pacific at a crossroads

The Bank of Japan's yield curve control was a focal point, with the market often misjudging the pace of change—a reminder of Japan's methodical approach to policy shifts. China faced its own set of growth challenges, particularly in its property sector, which signaled a continuation of accommodative policy stances.

The Chinese bond market witnessed contrasting forces at play in 2023. The onshore bond yields stayed low, which could be attributed to the overarching policy measures aimed at economic stabilization. In the offshore USD market, after a year of adjustments, there was an emergence of stability and a reduction in defaults, with growing interest in the Local Government Financing Vehicles—a segment worth watching due to its varied credit quality and degrees of government backing.

MarketAxess’ 2023 data reflects these broader trends within APAC’s fixed income markets. Our platform saw resilient growth against a challenging backdrop, with Average Daily Volume (ADV) increasing 17% over 2022. This growth was particularly notable in Asia Local Markets, which represented 33%of our global Local Markets volume. Despite a challenging trading environment for our clients in the first half of the year, we observed a strong recovery in the second half, with monthly year-on-year volume growth rates ranging from +18% in June to an impressive +65% in December.

Disproportionate flows and performance divergence in Asia

The narrative for Asia's credit markets in 2023 was complex. Despite a promising start, fueled by hopes of a Fed pivot and China's post-COVID recovery, reality soon set in. The Fed's additional rate hikes sent treasury yields soaring, dampening the initial optimism.

Asia's Investment Grade spreads managed to tighten due to strong demand and limited supply, outperforming their Emerging Market (EM) and Developed Market counterparts. However, Asia's High Yield (HY) sector suffered, primarily due to the downturn in China's property sector.

The J.P. Morgan Asia Credit Index (JACI) offered modest total returns, but this paled in comparison to risk-free investments like US treasuries. This sparked a debate on the relative attractiveness of treasuries versus credit investments.

Asia EM local currency bonds saw net outflows on our platform, except for Korea—a trend mirrored by public data showing that inflows into Asia EM local currency bonds were well below their annual average seen from 2018-2021

How firm automated their edge in 2023

Automation in fixed income trading became a trending phenomenon in 2023. Our platform saw a significant growth in trading activity using Auto-X™ RFQ, our tool for automatic, high-urgency liquidity acquisition, with trade volume seeing a 38% year-on-year growth in 2023. By the end of 2023, 44% of Auto-X RFQ trades were no-touch trades — reflecting a broader industry move toward leveraging technology for competitive advantage.

On the other side of the trade, trade volume using Auto-X Responder, our tool for automatic liquidity provision, doubled in 2023 from the previous year, while Adaptive Auto-X, our algorithmic trade execution and workflow assistant that adjusts to market conditions, also became a trader favorite – with trade volume using the tool doubling every quarter in 2023.

This growth in automation trading activity underscores the evolving needs of traders for more dynamic trading tools and indicates a shift towards not just a broader acceptance of automated e-trading, but a growing preference for more efficient, hands-off trading processes.

This was best demonstrated in a recent case study of UBS Asset Management, where the firm’s APAC Head of Trading, Khashayar Surti, outlined how his team found the best use of automation when trading Asia Investment Grade and Local Market bonds in “a reasonable size”. As the firm builds on this foundation, the ultimate goal is to move from “low-touch” to “no-touch” to improve future outcomes.

How data is driving trading decisions

The growing role of data and pre-trade analytics is revolutionizing trading decisions, particularly in Asia where access to unique and deep data sets can provide a competitive edge. Our machine-learning price engine, CP+™, and intraday trade tape, Axess All®, are prime examples of our response to market demands.

Amidst heightened market volatility in 2023, access to data and visibility on pricing became more vital than ever for bond investors and traders in the region. And it was not just indicative price data that they needed, but instead actionable transactional data that could be part of their trading workflow and decision-making. CP+ combines various data points, including TRACE data with MarketAxess proprietary data like delayed spot trades to derive robust pricing inputs. In the fourth quarter of 2023 alone, CP+ utilized over 325,000 bond prices per day to provide our users with the most accurate reflection of global markets.

Our intraday trade tape for the APAC and European markets, Axess All, is also on track to become an indispensable part of our clients’ workflow. Developed with partnership with the trading community as the simplest and most reliable wat to measure dynamic market liquidity, Axess All’s contribution-based model has proven to be a valuable tool for both sides of the trade — providing a market-led initiative that is democratizing data and boosting liquidity across the APAC fixed income markets.

What’s next for APAC fixed income markets?

As we turn our gaze to 2024, it is expected that the trends observed in the previous year will extend their influence into the new year. It will be interesting to see if the policy divergence between Eastern and Western central banks persist as a defining feature of the global financial landscape, and consequently, bond yields.

1. The rebalancing act

In 2023, we witnessed a rebalancing in Asia credit exposure away from China towards more investment grade sectors in Japan, Australia, and Korea—a trend likely to continue into 2024. These markets are becoming increasingly significant within APAC credit, offering more issuance and less volatility—attributes that are highly sought after by investors.

2. India's emergence

India's inclusion in the GBI-EM index is significant, poised to reach 10% weighting (highest possible for any country) and become an integral part of global EM Local Markets (LM) portfolios. With its high yield appeal, India may well outperform most global LM markets in terms of inflows and performance in 2024.

3. A fresh start for Asia Credit markets

For Asia Credit, we enter 2024 with compressed credit spreads but pockets of favorable yield opportunities. The region starts from a 'cleaner' slate after enduring a couple of tough years. With China's property sector now less dominant within JACI HY, its influence on overall performance is impacted, paving the way for other markets to contribute more significantly.

Demand from investors outside APAC, particularly from the US and Europe, is on the rise for these markets. This diversification of investor base is essential for the robustness of APAC bond markets going forward.

4. Automation and data will drive trading strategies

The growth in automation trading is expected to follow suit in Asia as the region’s markets become increasingly sophisticated and participants seek to leverage technology to enhance operational efficiencies and decision-making. The rise in lower-touch trading is likely to resonate with APAC market participants who are looking to streamline their workflows and reduce manual intervention, especially in a region where markets fragment.

The need for transparency and actionable data is also expected to reach an all-time high, especially in Asia's diverse markets where nuanced understanding of local dynamics can significantly impact trade outcomes. Market participants are beginning to seek higher levels of granularity to address their need for greater market color around pockets of valuable liquidity.

The vision for 2024

Despite a challenging 2023, the APAC bond markets are poised for a dynamic 2024 with a mix of caution and optimism. The markets are evolving, and with our data and insights, clients can navigate this landscape more confidently and effectively.

As we continue to observe and analyze market trends, we are committed to enhancing our products and developing new, innovative solutions to build on the resilience and adaptability of the APAC bond markets. Join us on this journey as we shape the APAC bond markets of 2024 and beyond.

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What 2024 holds for the APAC fixed income markets

As we navigate the early days of 2024, it's helpful to take stock of the year gone by—a year that was replete with global events and policy decisions that have left an indelible mark on the Asia-Pacific bond markets. In our latest piece, Riad Chowdhury, Head of APAC, and Roheet Shah, Head of Hong Kong, provide an analysis of how the economic undercurrents of 2023 have shaped the APAC bond markets, and what we might expect of APAC's dynamic financial landscape in 2024.

Highlights:

• The APAC bond markets have shown remarkable resilience in the face of global economic upheaval, with a trend towards diversification and quality investments.

• Investors are adjusting their strategies, reducing reliance on Chinese credit markets due to regulatory changes and market volatility.

• There's a notable shift towards Japanese, Australian, and Korean bonds, driven by the search for stability and potentially higher yields.

• The Federal Reserve's policy rates were a constant source of speculation, with the consensus being that a turn might occur around mid-2024.

• Bank of Japan's yield curve control and its methodical approach to policy shifts are leaving a unique impact on the regional financial ecosystem.

• China's policy measures to stabilize its economy, especially in the property sector, are scrutinized for their potential long-term effects on investment flows.

Amidst the economic turbulence, our data showed that trading activity within the APAC region continued to grow. We also observed a strong recovery in the second half, with monthly year-on-year volume growth rates ranging from +18% in June to an impressive +65% in December.

“Against the challenging backdrop, the APAC fixed income markets saw resilient growth in 2023. The markets are evolving, and with our data and insights, investors can navigate this landscape more confidently and effectively in 2024,” says Riad Chowdhury, Head of Asia-Pacific at MarketAxess.

As we look ahead, the trends observed in 2023 is likely to extend their influence into 2024. Read the article now to find out how we can leverage these learnings to shape a more resilient and adaptable bond market in the APAC region.