A plan to ration bond holdings in Taiwan shows just how desperate authorities are to revive activity in a market plagued by near-zero inflation.
Trading in the nation’s 10-year sovereign notes has plummeted 98 percent over the past decade as loose monetary policy and bouts of deflation pushed the yield down to 1.18 percent, the least in Asia after Japan.
Proposals to reverse the slump include limiting each organization’s purchases of corporate debt in the primary market and capping holdings of benchmark government bonds in the first six months of trading.
However, the proposed rule changes might not have much impact, said Frances Cheung (張淑嫻), a strategist at Societe Generale SA.
“If the large investors don’t change their strategy, if they can’t buy the bonds at first, they’ll buy them later,” Hong Kong-based Cheung said in a telephone interview on Monday. “After a while, the liquidity will return to where it was again.”
About 73 percent of the 10-year debt auctioned in Taiwan in March is now owned by the top three holders, according to the Taipei Exchange.
The single-buyer cap plan was announced on concern it would curb purchases by large investors such as state-backed Chunghwa Post Co (中華郵政), which holds NT$6.7 trillion (US$203.9 billion) of assets.
The financial industry has long been hampered by narrow lending margins and the outflow of funds to regional hubs such as Hong Kong.
The new proposals will ban any one investor from owning more than one-third of a new five or 10-year government bond in the first six months and cap a single buyer’s purchases at 80 percent of corporate notes sold to professional investors in the primary market.
With ample supply of cash, financial firms, seeing little room for capital gains, prefer to hold, while turning to overseas assets for returns, said Vince Lin, a fixed-income trader at Concord Securities Corp (康和證券).
Another reason for the low liquidity is that limited foreign buying of local bonds under existing restrictions has made market strategies very one-sided, Cheung said.
The low interest rates forced 89 of 90 domestic bond funds to either shut or shift their attention overseas in the past decade, with Prudential Financial Return Fund the sole survivor.
“More than half of the bond traders I know have left over the past decade,” Lin said. “With competition from foreign-currency investments, you’d expect trading in low-yielding Taiwan-dollar products to fall. The larger environment has changed, and you can’t reverse that simply with nominal policy changes.”
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