If there is a beneficiary of the Covid-19 pandemic in Taiwan’s financial market, it would be its domestic bond market as the appreciating Taiwanese dollar and the widening credit spreads of foreign currency bonds have pushed local fixed-income investors to pile into Taiwan dollar-denominated bonds over the past few months.

Data from Taipei Exchange show that since 2020, the monthly trading volume of Taiwan dollar-denominated bonds has grown for six consecutive months. As of the end of June 2020, the trading volume of the bonds on the Taipei Exchange stood at NT$22 trillion (US$746 billion), slightly below that of June 2019.

Flush with liquidity, life insurance companies are regarded as price-makers in Taiwan’s fixed-income market due to the size of their investments. As Formosa bonds continued to mature in 2020, Taiwan’s life insurance companies are increasingly allocating their undeployed capital towards Taiwan dollar-denominated bonds.

“In the past, lifers [life insurance firms] were more active in foreign currency-denominated assets. But with the FSC’s [the Financial Securities Commission’s] restriction and lower US interest rates, the capital will flow back to Taiwan dollar-denominated bonds going forward,” says a senior trader at a Taiwanese securities company.

On top of offloading Formosa bonds, insurers are also reducing their holdings in fixed-income exchange-traded funds (ETFs) to meet the latest FSC regulations. The FSC, in a bid to control foreign exchange and concentration risks, now requires that the investment of a single investor should not account for more than 70% of total issuance for all existing fixed-income ETFs. 

Fixed-income ETFs serve as an effective instrument for life insurance companies looking for a higher yield in foreign currencies. According to the FSC, as of November 2019, fixed-income ETFs totalled almost NT$1.3 trillion, with 96% of the investment coming from lifers.

With investors’ rising appetite for Taiwan dollar-denominated bonds and lower interest rates, local issuers are also increasingly tapping the capital market to capture the market window. As of the first quarter, Taiwan dollar-denominated corporate bonds amounting to NT$172.1 billion have been issued, representing a 117% year-on-year growth.

On June 12, Chung Hwa Telecom announced that it would issue its first-ever corporate bond in local currency with three tranches totalling NT$20 billion. TSMC also tapped the Taiwan dollar-denominated bond market, raising NT$60 billion in three tranches in the first half of 2020.

As of July 10, the five-year treasury yield stood at 0.34% while Chung Hwa Telecoms’ five-year bond is expected to be priced from 0.5% to 0.52%, representing a credit spread of over 15 basis points.