Gimme shelter

Asian safe havens: Asian government bonds are strong, even as fears for global growth and US and European debt worries roil equity markets. It's not that investors believe Asian economies will escape from the slowdown in the world’s largest economies. That's clear from the weakness in Asian stocks. But Asia's governments - from Australia to Taiwan - have built up strong balance sheets compared with the United States and EU. To global investors, Asian sovereigns increasingly look like safe harbours.

The bounce in bond prices may seem unremarkable to Western investors, used to seeing fixed-income assets move in the opposite directions to equities. But in Asia, to date, both sets have marched in tandem, as much on global risk appetite as on local business prospects. When stocks were rising on enthusiasm for China-led growth, bonds went with them. Reductions in risk appetite hit demand for all the region’s supposed racy assets.

But sovereign debt fears in the EU and the United States have been chipping away at perceptions of risk. People used to talk about a mispricing when the gap between what small or developing economies paid to borrow tumbled relative to what the United States paid. Now, with confidence in Western credit-worthiness ebbing, the Philippines pays only 3.6 percentage points more than the United States to borrow 10-year money. And, it raises far fewer eyebrows.

Why? Supposedly-prudent Germany runs a debt-to-GDP ratio of 80 percent. The Philippines’ is 47 per cent. Australia's is just 24 per cent and the figure for South Korea is 29 per cent. Indonesia, which in 1998 had to be bailed out by the IMF, has a debt-to-GDP ratio of just 25 per cent. All these countries, barring Australia, run current account surpluses. And because they are lifting interest rates to curb inflation, all pay investors more than either the United States, Germany or France.

As the going across global equity markets gets tough, the tough are turning in increasing numbers to Asian bonds.