When Kevin Shih started his career as a fixed-income trader in Taiwan five years ago, local government bonds accounted for 70% of his portfolio. Now, it’s less than a tenth.
“I haven’t done a single Taiwan government bond deal so far this year,” said Shih, a proprietary trader at JihSun Securities in Taipei.
Paltry yields and low volatility are driving Shih and his peers out of Taiwan’s NT$5.7 trillion ($204 billion) sovereign debt market, sending daily transactions in benchmark 10-year notes to record lows. Traders are turning instead to riskier wagers overseas, an echo of the years-long shift in Japan that’s poised to funnel more and more Taiwanese cash into global markets.
As in Japan, the slump in Taiwan government bond trading is partly a consequence of years of loose monetary policy. The island’s cash-rich life insurers have also been instrumental in keeping the yields low and trading activity muted, snapping up freshly issued bonds and mostly holding until maturity. The industry has limited scope to invest overseas due to regulations on foreign-currency exposure.
Taiwan’s benchmark 10-year bond yield fell to a record 0.24% in November and is currently sitting at about 0.37%. The central bank prevents yields on long-term debt from going negative by issuing certificates of deposit to commercial banks in order to absorb excess liquidity in the system.
Despite those efforts, Taiwan is heading toward what Alvin Yang, executive vice president at KGI Securities in Taipei, calls “Japanization.”
Trading in Japanese government debt has collapsed due to aggressive bond-buying and yield-curve control measures by the Bank of Japan, which has pushed yields to below zero. The central bank now owns more than 40% of Japanese government bonds. Annual turnover in benchmark Japanese government bond futures fell to its lowest on record last year.
As such, Japanese traders have branched out into other areas such as currencies in search of higher returns.
Taiwan’s traders are now following a similar path. Rachel Chang, a trader at Capital Securities in Taipei, said her Taiwan government bond trading team was renamed simply to “Trading Department” last year. Chang now trades other assets such as commodities, U.S. Treasuries, and emerging-market fixed-income products.
Such changes could pose risks for financial institutions as traders venture into less familiar assets. Shih at JihSun Securities said he now spends most of his time trading U.S. Treasury futures, which puts him under greater pressure as he needs to bear more foreign-exchange risk and is unable to respond to volatile market conditions overnight.
The slow days for Taiwanese government bond traders are likely to continue, Yang said. He doesn’t foresee any major rate increases from the central bank for the next two decades due to low inflation.
Stanford Chen, a senior trader at the Agricultural Bank of Taiwan, said the government needs to take action to revive the local government bond market by issuing more debt -- though such a move would run up against the ruling party’s stated goal of reining in government liabilities.
The lender, one of the most active market makers of local government bonds, has increased its overseas investments to as much as 65% of its portfolio this year from 30% before 2018.
“Government bonds are indispensable for a mature market, but the government is already in a semi-giving-up mode,” Chen said. “This is just not right.”
— With assistance by Chikafumi Hodo