Retail bonds provide stability, attract individual investors, and support financial literacy in Asia's growing bond market.
Retail bonds are neither new nor terribly exciting financial instruments. However, they are proving powerful conduits for financial stability and increasingly feature as funding sources for Asian finance officials.
Retail bonds are investment products offered directly to the general public rather than to banks and institutional investors. They provide regular income to investors, paying interest at least once a year with tenors of three years or longer. Retail bonds are available for subscription through conventional channels but also through phone and web apps using digital ledger technology.
Their appeal lies not only in the safety provided by a government issuer, but also in their availability for subscription in small amounts. For individual savers, retail bonds are an attractive alternative to bank deposits, often offering higher interest rates.
For governments, retail bonds offer access to that elusive “sticky money” that remains invested for an extended period, rather than being quickly withdrawn. This is the bedrock of financial stability since investors tend to adopt a buy-and-hold approach. This can reduce a country’s dependence on foreign portfolio investment, alleviating vulnerability to rapid, unanticipated withdrawals of hot money for analogous reasons.
Retail bonds can also contribute to weaning developing countries off excessive reliance on foreign currency borrowings, which was one of the main catalysts for the Asian financial crisis of 1997-1998.
A welcome side-effect of retail bonds is their impact on promoting financial literacy among the broader population and supporting a healthy savings culture. Issuers of retail bonds in Southeast Asia report that the millennial demographic (20-40-year-olds) is particularly active in these investments, with retirees, cooperatives, and overseas nationals featuring frequently.
Risks on retail bonds are manageable for investors so long as the main issuers are governments or highly rated issuers.
In February 2023, Indonesia raised $1.75 billion equivalent in rupiah from its first retail bond offering of the year, paying 4.9% for three years. There were 56,238 individual savers subscribed to this offer, with at least half being millennials. The Philippines also issued a retail bond in February, raising $5.14 billion in pesos through a new 5.5-year issue.
Notably, the Philippines satisfied 40% of its 2022 annual borrowing program through the issuance of dollar and peso retail bonds, raising 878 billion pesos (about $16.1 billion) in aggregate. Overall retail bonds represent 37% of the outstanding domestic debt of the Philippines.
Thailand has also been innovative, issuing “Happy Savings” government bonds through an e-wallet. Investors may subscribe for as little as 1,000 baht (about $30) and enjoy steady increases in interest rates through step-up coupons the longer they hold their investments. This is clever since it doubles down on locking investors in for longer periods, contributing further to financial stability.
While wholesale bond issues, such as those issued by Asian Development Bank, are often completed in less than 24 hours, retail bond subscription periods can extend to 15 days, since retail investors are not as nimble as professionals. Usually, this does not prejudice the issuer in any material way, so long as no interest rate or currency hedging is attached to the exercise.
Fortunately, this is rarely the case since retail bonds are generally only offered domestically, given that national regulation, taxation, and subscription channels have limited international reach. In any case, Exchange-Traded Funds (ETF), Undertakings for Collective Investment in Transferable Securities (UCITS) and mutual funds already facilitate similar opportunities on a cross-border basis.
Risks on retail bonds are manageable for investors so long as the main issuers are governments or highly rated issuers. A Swiss commercial bank's recent $17 billion default on its hybrid capital AT1 bonds provided a salutary lesson to Asian retail investors that reward does not come without risk. But governments must tread a delicate path between regulating for investor protection and limiting financial choice.
In August 2020, the Hong Kong Monetary Authority relaxed rules on the retail distribution of low-risk, non-complex retail tranches of Hong Kong, China or People’s Republic of China government bonds. In Japan, ADB offers uridashi local currency bonds to retail investors seeking yield enhancement. Still, the investor is avoiding credit risk by investing in a secure AAA-rated issuer while benefiting from a high-yielding currency.
As Asian retail bond markets grow, they will increasingly influence the cost and nature of government borrowing programs. During times of financial stress, they will suffer less from outflows, since domestic investors' flight to safety route is usually to cash or government bonds.
During the good times, they offer a reliable “sleep-well” segment to any diversified personal savings plan. And given the low barriers to entry, they should feature as an important funding source for governments throughout the Asia and Pacific region.