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Bond market dynamics in primary and secondary markets
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This episode is also available as a podcast, search "Global Viewpoint" on your preferred podcast player to watch, listen, and subscribe.
Adam Bothamley, Global Head of Debt Capital Markets, HSBC, together with George Sun, Head of Global Debt Markets, Asia Pacific, HSBC, discuss fixed income market dynamics – in both the primary and secondary markets. What are the main drivers of liquidity over the next year and how the primary market supply will develop for the rest of 2025?
This episode was recorded on the sidelines of the HSBC Asia Credit Conference 2025. Find out more here: https://www.business.hsbc.com/en-gb/campaigns/asia-credit-conference
Disclaimer: Views of external guest speakers do not represent those of HSBC.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:00
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:12
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Focus on Fixed Income Market Dynamics
00:00:19
Speaker
Hi there, I'm George Sun, Head of Global Debt Markets for APAC at HSBC.
00:00:24
Speaker
In this episode of Global Viewpoint, I shall be in conversation with my colleague Adam Botham Lee, Global Head of Debt Capital Markets at HSBC. We certainly have a lot to talk about. We're recording at HSBC's Asia Credit Conference 2025, and in this episode, we're going to talk about the fixed income market dynamics in both the primary and secondary markets.
00:00:45
Speaker
We can start with a broad overview of the global markets. This year has been characterized by currency volatility and continued uncertainty about interest rates, partly due to trade and geopolitical
Currency Volatility and Central Bank Policies
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tensions.
00:00:56
Speaker
Do you think that these dynamics will continue for the rest of the year, and how have these issues impacted the primary markets? Thanks, George. And good to be here with you today. um Look, I think that's the question that is on everyone's minds.
00:01:10
Speaker
um How do we see these dynamics playing out for the rest of the year? And how should issuers and investors navigate that backdrop given all the uncertainties that we face? um From my perspective, I think it's quite hard to see any real near-term resolution to many of the issues that are facing ah investors and issuers today.
00:01:30
Speaker
I think if we look at the monetary policy ah framework, um clearly the messaging we're getting from the central banks is fairly direct, ah with the Fed effectively on pause, the ECB coming to the end perhaps of its... ah ah easing cycle.
00:01:45
Speaker
um And issuers and investors are going to have to navigate that backdrop, as well as the various geopolitical tensions and the ongoing trade dialogue to the best of their abilities.
00:01:56
Speaker
In terms of the impact on the primary markets, um quite, um I guess, perversely, the impact has been very positive in terms of the levels of supply. um Why is that the case? Well, I think firstly, many issuers are ah looking at the volatile backdrop and particularly the volatility that we saw in April.
00:02:17
Speaker
And that's a big reminder that accessing the capital markets when conditions are strong is really important because, um you know, clearly ah with this level of volatility, it may be the case that we'll have ah periods of market closure. So i think that's kind of the first point. so I think the second is with this volatility, many issuers looking to pull forward their plans from a funding perspective um and pull forward supply that may have been targeted for later this year ah or even into 2026 and bring that forward into this market environment, ah given that the conditions remain, despite the news flow, very, very strong.
00:02:55
Speaker
um As I'm sure we'll talk about, we're seeing credit spreads depending on the market, pretty close to the tights that we've seen them, ah which is certainly a good backdrop for for borrowers. One of the dynamic that we're really seeing changing, I guess, from a primary market's perspective on the back of all this volatility is maturity preference.
Market Resurgence and G3 Bond Issuance
00:03:15
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um Clearly, we've talked a lot about the steepening of the US Treasury curve, and that has certainly put some borrowers off from accessing the long end of the dollar market due to the underlying interest cost ah with a focus on shorter duration instruments.
00:03:29
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And again, that as an evolution over the course of this year, I think will be an interesting one to watch as the US Treasury curve kind of settles in, but also as issuers reassess their requirements from a ah maturity perspective.
00:03:43
Speaker
Very good. Thank you, Adam. Now, last year in the Asia primary markets, the story was all about lack of supply, actually, in the primary issuance market. But we had a sharp pickup this year with G3 bond issuance of 48% just in 2025. What do you think is behind all this recovery?
00:03:57
Speaker
what do you think is behind oldests recovery Yeah, I think, um I mean, clearly the the resurgence to some degree of issuance from China is ah is a key part of that. um You know, 2022 and 2023 were very difficult years um and volumes were were very, very low.
Growth in Asian Local Currency Markets
00:04:15
Speaker
um So I think fantastic to see that we're now seeing um you know broader market acceptance of some of those corporates and financials coming back to the market. And that's been a large part of the the growth that we've seen, um particularly in G3 currency issuance over the course of of this year.
00:04:31
Speaker
Now, many of those transactions um have been placed you know quite locally, I would say. um And you know more broadly, the the increase in kind of offshore place supply ah has been driven by you know some of the other the markets, such as Korea, which has continued to grow in in terms of its you know global market presence.
00:04:49
Speaker
And we're lucky enough to be involved ah in some great transactions, actually, from Korea ah over the course of this year. um And also from other Asian regions, Hong Kong is very active. i mean, we're here today with many clients.
00:05:02
Speaker
ah So the the recovery is is very broad based. But I think that the reason we've seen such sharp increases due to China and due to the increase in volumes um from China.
Asian Investors and International Market Participation
00:05:12
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um Will that continue? Look, we certainly hope so.
00:05:14
Speaker
um Expectations right now are that risk appetite will remain strong. ah Certainly on the investor side, the liquidity that we're seeing being afforded to Asia, ah both from within Asia and outside, is very, very strong. ah That's great to hear. And um what about the local currency markets in Asia? How have they fared in 2025 so far So I think the Asian local currency markets have been one of the big success stories, actually, of the last, not just this year, ah but the last couple of years. And in fact, the big growth in volumes from ah the local currency markets happened really in 2024.
00:05:49
Speaker
And we've seen that a a continued ah growth over the course of 2025 as well. I think there are a bunch of reasons why that's the case. um And I think if we look across each of the individual markets, there are probably some different drivers.
00:06:03
Speaker
But the common thematics would be firstly, lower onshore rates than offshore rates in many of those currencies for borrowers that have requirements in those currencies. ah So with dollar rates having gone higher, no need for many corporates to go and issue in dollars when they can access an increasingly liquid ah local currency market.
00:06:23
Speaker
um I also think that in terms of international appetite for those currencies themselves, we've seen an expansion of the investable universe ah so that the depth of those markets and the amount that issuers can raise has gone up, making them more viable compared to, for example, dollars as a currency.
Local Operations Funding in Asian Markets
00:06:41
Speaker
There are some specific dynamics around, for example, the Aussie dollar market, where the growth in superannuation funds has been really important in terms of driving ah demand for that currency.
00:06:51
Speaker
And then finally, pricing, ah where certain markets, a great example being the Singapore dollar market, is offering issuers the the ability to print particularly more subordinated products at pricing, which is very compelling relative to US dollars or or other currencies.
00:07:08
Speaker
That's great. That's great, Adam. um Now, moving on to cross-regional flows in credit. How are Asian investors this year participating more in the international markets? Are there any markets in particular that they're allocating more to or less to?
00:07:21
Speaker
Sure. Again, i think that one of the the big themes of the last few years has been this internationalization of Asian demand. um We continue to see a growth in investable wealth in Asia generally.
00:07:34
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um We're seeing, as we've just talked about, that benefiting local currency markets, but also the international markets as well. And I would say the US dollar market continues to be the you know the market of choice for investment of that investable asset base.
00:07:48
Speaker
And within that, you know we're seeing that across the board, whether it be emerging markets, whether it be developed market credit markets, um Whether it be hybrid capital structures. um So we're continuing to see that and we're continuing to see that grow.
00:08:01
Speaker
It's interesting that we've we've seen borrowers really try and target that liquidity um using various tactics, right? Be that marketing directly with Asian investors, um which we're very grateful to have been involved in with a lot.
00:08:15
Speaker
um Whether it be announcing transactions into the Asian time zone rather than waiting for ah the London or the US Open to really give Asian investors time to place their orders and to understand the credit and to do their work to be able to participate.
00:08:30
Speaker
um Or be it um you know providing liquidity in the secondary market, which I'm sure we'll come on to talk about and how banks are setting up to provide global liquidity.
Expansion of Private Credit Market in Asia
00:08:39
Speaker
to make sure that the investor base here in Asia ah really is ah able and confident to invest in offshore securities and know that they'll have liquidity ah in their own time zone as well. So I think a multitude of factors and certainly something that we expect to continue to see growth in ah going forward.
00:08:56
Speaker
And how about going the other direction? To what extent do you think international investors are looking to Asian fixed income as a diversification strategy? Yeah, look I think that's definitely a theme. um I think that we're seeing it in certain pockets, um both into Asia. So, you know different pockets within Asia buying different local currencies. um You know, I think the, the I guess, um other dynamic from a pricing perspective to what I mentioned earlier is that some of these markets are actually quite expensive for international investors.
00:09:26
Speaker
um So whilst we're seeing some diversification from a mandate and a currency exposure perspective, um I guess that's being played out probably more through the sovereign bond markets and the currency markets than it is ah through the credit markets.
00:09:39
Speaker
um But again, we expect that to continue to develop as we go through and see those markets improve in terms of liquidity and become much more of a long term part of international investors' portfolios.
00:09:50
Speaker
Okay. And then can you tell us a little bit about the local entity funding strategies that are evolving in Asia? Sure. um I think that the um one of the side effects of um what we're seeing from, ah I guess, a global trade perspective, from a supply chain protection perspective, is that many issuers are looking to fund local operations more locally than they perhaps have done ah in the past.
00:10:18
Speaker
um And that's, you know I think, a theme that we'll continue to see develop. And I think we're seeing that you know primarily in RMB, whether that be onshore in terms of onshore funding in the domestic market, or whether that be offshore in terms of issuing into the offshore market. But by the way, we're continuing to see much more demand from onshore investors in the offshore market as some of the quotas are relaxed.
00:10:42
Speaker
um So I think that's definitely the you know the the main market we're seeing that in. The Hong Kong dollar market is also one where I think issuers are keen to fund locally, ah perhaps more so than they have done in the past.
00:10:55
Speaker
And that's been met with a growth in the investor base as well, such that the number of investors, the depth of the market, and importantly, the tenors that are available have been growing. ah So we've seen issuance in that market out you know it's to 20 and 30 years.
00:11:09
Speaker
In the CNH market, we've seen issuance out to 10 years, which has predominantly been a five-year market. So that growth in terms of the investor base, the growth in terms of the tenors, combined with the willingness of issuers to fund local entities more locally in terms of currency, you know I think has been a big driver. And again, ah think we'd expect to see that continue as well.
00:11:30
Speaker
So maybe, George, turning to the secondary markets, private credit has been extremely active this year in Asia. Could you give an idea of the scale of the dealmaking in this space and what it broadly means for fixed income markets right now across the region?
00:11:44
Speaker
ah Thank you for asking, Adam. This is a hot topic in the ah in the global and the Asian fixed income markets. um Private credit, ah kind of loosely defined, is about a $3 trillion dollar market size in the global markets.
00:11:58
Speaker
But only 10% of that is in Asia so far, but it's growing pretty quickly, ah including at HSBC. So um given that HSBC is so fundamentally entrenched into ah coverage networks throughout Asia, and we know corporate institutions so well, it allows us to access a lot of borrowers who may have some difficulty coming to the public markets, perhaps, or they have they don't have a bond outstanding, but they want to access the private markets. Look, ah we're pretty dedicated growing this private credit business by enhancing our origination, distribution, and trading functions within our within our bank.
00:12:31
Speaker
We've even created a new capital markets and advisory function that will go and originate these transactions. and And it's in the news that even our asset management division has allocated $4 billion of capital to invest in
Shift in Secondary Market Flows
00:12:44
Speaker
private credit.
00:12:44
Speaker
Yeah, really interesting, George. And do you think that expansion of the private credit market helps to explain to some degree why high-yield bond issuance has been so low this year? I think it partially explains it, but not entirely.
00:12:56
Speaker
think a few years ago, when the Asia high-yield market took a bit of a dip with the high-yield property market declining, I think after that, some of the these borrowers found it harder to come to the dollar public markets, and they might have moved into the local currency markets and then to loans and private financings.
00:13:13
Speaker
So kind of naturally led to the more private financings. But as the public bond markets ah yields got tighter, um I think some of the investors were looking for a bit more bit more returns And so they're looking for private credit, kind of a bit more illiquidity, but higher returns, ah but with certain covenants and collateral in these financings to make it more interesting.
00:13:36
Speaker
So this kind of ah this kind of marriage of ah ah more difficulty to coming to the high yield public markets, plus a little bit more yield for the investors um makes a makes a great um kind of joining point for an increase in the private credit markets.
Asia's Tight Credit Market
00:13:52
Speaker
And from a secondary market perspective, George, what are the main themes you're seeing over the course of this year? Okay. Well, on a secondary credit market, just like in the primary market, we've seen a um a market uptick actually ah year to date. So we have clients um you know across the world who are interested in Asian credits as well.
00:14:11
Speaker
um Now, we do see a diversification and ah in non-US dollar credits as well on the secondary side. So for example, some locations, the percentage of credit flows, secondary credit flows in US dollars has was this high was his highest as high as 90% or higher last year.
00:14:28
Speaker
But some of those ah centers have declined to maybe 60% or 70% this year. They moved into euros, they moved into Aussie dollars, and even some other local currencies as well. So for example, some of the local currency opportunities have really been a theme actually, ah both on primary and secondary markets.
00:14:45
Speaker
ah And um in particular, the most popular ones have been ah Hong Kong dollar, CNH, Sing dollar, Aussie dollar, and also some of the other local currencies like ah like India rupee. I'll give you some examples. ah ah Hong Kong itself has been very, very active.
00:15:02
Speaker
So whether it's on the primary, secondary side, the Hong Kong government bonds, these kind of really ah Hong Kong-led companies have been very, very active in secondary bond market for us, a lot of interest.
00:15:13
Speaker
ah Similarly, Hong Kong dollar has been super popular. um You might have seen in May, ah Hong Kong dollar rates dropped from high board, dropped from about 4% to 0.6% one month, actually.
00:15:26
Speaker
ah Lots of liquidity in this market. but So lots of investors interested in in this and issuers interested in this as well to to use this excess liquidity in the markets.
00:15:36
Speaker
So we've seen an interest in so-called wonton bonds. ah So kind of international names issuing in Hong Kong dollars on the primary side, as you know. So Hong Kong itself has become um very vibrant as a ah as a center, not just for originating, but trading ah these bonds and including in its own currency.
00:15:53
Speaker
right And also what we find is that um A lot more flows are coming from local centers into these hubs. So from China, the southbound bond connect, that's been very, very popular, partly because of the interest interest rate differential, which remains very low in China, but relatively high in the dollar market overseas. Great, George. So it sounds like there's similar themes on the primary and secondary markets, which are complementing each other.
00:16:17
Speaker
How is that feeding through, would you say, into valuations? How does Asia credit look, for example, versus the US and and and Europe? And how do you see that developing?
Advancements in Electronic Trading
00:16:26
Speaker
Well, Asia credit is pretty tight at this point, actually.
00:16:29
Speaker
And it's even tight compared not only to its own historical levels, but to U.S. and Europe. And this is partially supported by the importance of private banks and the wealth management flows in Asia, which is very, very strong, actually.
00:16:43
Speaker
um So what we see is that the secondary market performance of Asia, especially especially IG bonds, has been particularly strong, actually. Performance has been good um so that over the last three years, things have just been tighter and tighter in the ah Asia IG market.
00:16:57
Speaker
However, the fundamentals of these companies are also very strong. So we're not seeing um the risk increasing ah very much. um And in addition to it being tight, we're seeing...
00:17:08
Speaker
ah Local currencies become even more important as well. So one example would be dim sum bonds here in Hong Kong. um The volume has actually tripled, actually, since 2021. So the amount of dim sum bonds, CNH bonds being traded in the Hong Kong market is really ah quite substantial now, about 2 trillion RMB in size.
00:17:27
Speaker
Great. and And maybe just the last question from my side, thinking about like electronic trading, um how has that affected the availability of liquidity in the secondary market? um How does Asia compare, would you say, to other regions?
00:17:41
Speaker
And how would you think about HSBC's offering in this area? Well, this is a very good question because we've seen um this asset class, the credit asset class, become a bit more digitized ah in the US and Europe, for example.
00:17:53
Speaker
And now it's coming to Asia as well. ah So I think this will improve the liquidity for both institutional investors and also the private banks and wealth investors as well. um So what we see is this ah ah this whole algorithmic trading, um which we've actually spent a lot of effort to develop at HSBC, ah is becoming much more popular among our client base.
00:18:14
Speaker
ah among our private bank and wealth clients, among our institutional clients and others. So, for example, we've developed a, we're the first ones to develop a live streaming two-way ah guarantee price ah in our click-to-trade algo model.
00:18:30
Speaker
And this really is very active. and um And this kind of centralized pricing and execution really allows us to provide a very ah fluid and um institutionalized pricing for all our clients, including the ah wealth and retail clients. So this is very popular.
00:18:47
Speaker
and It allows us to really provide a lot more liquidity. So that's growing and very, very active. um And I would say the type of bonds that we're able to put on the platform has been increasing over time as well.
00:18:59
Speaker
So we started with US IG and Asia IG. We've moved into... European IG, now we trade MENA and Latin bonds as well. So right now we trade over 5,000 bonds on our algo system.
00:19:10
Speaker
So that's pretty cool. And then maybe the last point I would say is we're always looking for ways to improve liquidity. ah That's so important for the ah for these issuers and for our investors.
00:19:21
Speaker
So one recent way we've developed improved liquidity is through ETFs, actually, fixed income ETFs. So we're actively supporting the creation and redemption activities for fixed income ETFs during Asia hours.
00:19:32
Speaker
Most recently, we assisted one of our clients to issue the first Saudi Sukuk ETF, actually, in Hong Kong at the end of May, which then supports the Asia-Mina corridor business as well.
Predictions for 2025
00:19:45
Speaker
That's great. Well, Adam, we can end the podcast with some forward-looking thoughts. How do you think primary market supply and demand will develop for the rest of 2025? Look, I think um the base expectation probably is a continuation of the same themes, right?
00:19:59
Speaker
um I think we can expect volatility to remain relatively elevated. um I think there are a number of ah you know key unknowns as it relates to central bank policy and government put policy, particularly in the US.
00:20:11
Speaker
And borrowers are going to continue to need to react to that. um And I think that means being nimble, hitting windows whilst we're there, ah whilst they're there and ah being opportunistic when it comes to hitting diversified markets and taking good windows of execution as and when they become available.
00:20:29
Speaker
I would say I would expect probably supply to run a marginally slower rate in the second half of the year relative to the first half. But then again, we may well see some pre-funding ah in quarter four. So continue to see a busy market ahead and continue to see issuers and investors needing to navigate what will be ah probably a volatile backdrop.
00:20:50
Speaker
And on your side, George, what do you think will be the main drivers of secondary market credit trading over the rest of the year? Well, Adam, I think it reflects somewhat of what you just said, actually, to stay nimble among ah continuing volatile markets.
00:21:04
Speaker
For example, um this 90-day pause in the global tariffs actually are going to come to an end relatively soon. um And if I look at ah the Asia and U.S. credit markets today compared to April 2nd, the Liberation Day levels, it's actually tighter today.
00:21:20
Speaker
So... On the secondary side, perhaps there's a a bit more downside risk than upside risk at this point. So investors are watching it very, ah very carefully, especially as we enter the summer months where liquidity can slow down because people go on vacation, etc.
00:21:35
Speaker
So I think people are really watching it very carefully to be nimble if there is a bit of a wobble because of geopolitical or trade or any other reasons, ah it seems like investors are ready to pounce on it actually and actually ah buy it up pretty quickly. So it's been the secondary markets have been amazingly resilient so far this year, including in April, and we expect it to continue.
00:21:55
Speaker
Adam, I'd like to thank you very much for joining me in this episode of Global Viewpoint. It's been a very insightful conversation. And for our audience at home, thank you for taking the time to listen in. Thank you for joining us at HSBC Global Viewpoint.
00:22:09
Speaker
We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.