GREENWICH, Conn. (HedgeWorld.com)–A new report from Greenwich Associates Inc. analyzes the fixed-income investment market in Asia and describes it as growing both in volume and in sophistication.

Institutional investors in Asia have capitalized on low interest rates over the last five years.

“It has not been much of a challenge to make money in fixed income over the past five years,” according to Greenwich Associates consultant Tim Sangston. Perhaps unsurprisingly then, fixed-income trade volume throughout Asia increased nearly threefold from 2001 to 2004, from US$318 billion to US$928 billion. But the friendly climate may be about to change, raising the question of whether Asia’s fixed-income investors are prepared to weather a period of increasing rates.

Mr. Sangston said, based on 525 interviews conducted by Greenwich Associates with senior investment officials at a variety of financial institutions in Asia, excluding Japan, that Asian fixed-income investors remain bullish about the future of the industry, that they are aware of the need to develop specialized in-house knowledge of segmented product lines and that they’ve learned valuable lessons from the United States and Europe with regard to regulatory and compliance issues.

Not all trends have been upward. In Japan, fixed-income assets under management have been flat during this period and trade volume has declined year-to-year. Also, over the last year trading volume has fallen in both Singapore and Malaysia. In Asian overall figures, the volume of trade in government bonds has declined by 3% among all non-central bank investors.

One consistent upward trend is the embrace of domestic bonds. In South Korea, the Philippines and Singapore, local currency bonds make up nearly 33% of the fixed-income volume. In Thailand, India, Indonesia and Malaysia that number is more than 80%.

Asian investors have grown comfortable with a wider range of instruments within the fixed-income domain in recent years, and the Greenwich report suggests that these instruments are helping Asian institutions prepare for a credit crunch that may now be developing.

“To date we have not seen huge spikes in the trading volume of these products,” Mr. Sangston said, “but the adoption rates revealed in our research show that these products [interest-rate derivatives, credit derivatives and structured products] are spreading rapidly through the market.” He added that usage rates are a more accurate reflection of market dynamics than trading volumes.

Meanwhile, electronic trading is steadily gaining converts among Asian fixed-income investors, although e-trading there still lags behind its use in Europe and the United States–a lag the report attributes to the fragmented nature of the market.

In the United States, for example, 64% of government bond investors trade electronically. In Europe, that number is 46%. In Asia, it’s 17% in 2004, up from 10% in 2003.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.