Formosa Bond Boom and No-Calls (2010s)

A Formosa Bond is a bond issued by a foreign issuer in Taiwan's local market, typically denominated in USD. Listed on the Taiwan Stock Exchange, the primary demand comes from Taiwanese life insurers. 'Formosa' is Portuguese for 'beautiful island' — a traditional name for Taiwan.

The market's origin is straightforward: Taiwanese life insurers hold long-dated dollar-denominated liabilities (insurance policies), requiring matching long-dated dollar assets. Taiwan's domestic bond market is small and short-dated. Offshore dollar bonds faced regulatory constraints.

Formosa bonds were the solution. Foreign issuers (banks, SSAs, corporates) issued under Taiwanese local law, and Taiwanese life insurers could invest directly. For issuers: access to Taiwanese investor base. For insurers: long-dated dollar asset acquisition. A beneficial trade for both sides.

The structural problem of Taiwan's life insurance industry is an asset-liability maturity mismatch (ALM mismatch).

Insurance products sold in the 1980s–2000s promised high guaranteed returns — some as high as 6–7% annually. But as Taiwanese interest rates fell, meeting these obligations through asset management became extremely difficult.

Life insurers hold long-dated liabilities of 20–30 year maturities. Matching these requires equivalent long-dated dollar assets. But Taiwan's domestic bond market lacks long-dated instruments. Offshore dollar bonds faced foreign investment quota regulations and currency risk.

Formosa bonds resolved this dilemma. Issued domestically, they didn't consume foreign investment quotas; denominated in USD, they met ALM needs; with 30-year maturities (including callable structures), long-dated matching was possible. Cathay Life, Fubon Life, and China Life Taiwan were among the major investors.

Between 2013 and 2018, the Formosa bond market grew explosively, with cumulative issuance exceeding $150B+.

The typical structure was 30NC5 or 30NC10: '30-year maturity, callable after 5 years (every 5 years thereafter).' Investors bought knowing the tenor was technically 30 years, but under the assumption the issuer would call at year 5. In form a 30-year bond, but priced by the market as though it were a 5- or 10-year instrument.

Issuers were diverse. Global banks — HSBC, Deutsche Bank, Société Générale, Barclays, ABN AMRO — used Formosa bonds for AT1 and Tier 2 capital issuance. SSA issuers including ADB and IADB also participated. Issuance spreads were often favorable for issuers, supported by overwhelming demand from Taiwanese life insurers.

At its peak, Formosa bonds grew to account for 20–30% of Taiwanese life insurer dollar assets.

Two shocks rocked the Formosa bond market after 2018.

The first was tightened FSC regulation. In 2018, Taiwan's Financial Supervisory Commission capped life insurer Formosa bond investment limits. The demand engine driving tens of billions in issuance was suddenly constrained. New issuance demand collapsed.

The second was a no-call wave. With the ECB's NIRP pushing European rates into negative territory, reset rates at call dates often fell below original coupons — theoretically removing the incentive to call.

Santander's AT1 no-call in February 2019 was the coup de grâce. With the 6.25% coupon expected to reset to approximately 5.4%, Santander forewent the call and let the bond extend. The market convention that 'callables are always called' collapsed in that moment.

Formosa bond investors took a direct hit. Bonds bought with the expectation of a 5–10 year call were extended to their full 30-year tenor. Extension risk had materialized. Secondary market liquidity deteriorated sharply.

The Formosa bond market left bond investors with two core lessons.

First, **YTC vs YTW**: investors analyzed bonds on a YTC (Yield to Call) basis, assuming call options would be exercised. Most investors who bought 30NC5 Formosa bonds during the boom didn't properly consider what the YTM (Yield to Maturity) was. After Santander, analyzing on a YTW (Yield to Worst — the lower of YTC and YTM) basis became standard.

Second, **concentrated demand risk**: a market structure sustained by one investor group (Taiwanese life insurers) is fragile. A single regulatory change transformed the market itself. Issuers also experienced firsthand the importance of investor base diversification.

After 2020, new Formosa bond issuance plummeted. Global AT1 and Tier 2 issuance migrated to other Asian centers like Hong Kong and Singapore, while Taiwanese life insurers sought alternative channels. A classic case of structural demand creating — and then disappearing from — a market.