Yields on bonds in emerging East Asian markets have declined in recent months as concerns about a US Federal Reserve rate hike eased for the moment and as inflationary pressures remained largely muted, the Asian Development Bank’s (ADB’s) latest Asia Bond Monitor said.“Financial markets have been somewhat calmer recently with the US Federal Reserve holding off a rate hike in September, the People’s Republic of China (PRC) carrying out further monetary stimulus, and oil prices remaining subdued,” said Shang-Jin Wei, ADB’s Chief Economist. “Overall the markets are better prepared to deal with any impact a US rate hike may have on another outflow of foreign investment, but risks do remain and there is still a pressing need to increase bond liquidity and broaden the diversity of the investor base.”
The report notes that yields for 10-year local currency government bonds in emerging East Asia were mostly lower between 1 September and 31 October with stock markets in the region staging a comeback, giving investor sentiment a lift. The Philippines saw the largest yield drop of 64 basis points with the PRC; Hong Kong, China; and Singapore all posting declines of over 30 basis points. Over the same period, most East Asian currencies also appreciated against the US dollar, with the Indonesian rupiah and the Republic of Korea won recording the biggest gains of 2.9% and 2.7%, respectively.
Emerging East Asia’s outstanding local currency bonds were up nearly 6% in the third quarter compared to the previous 3 months and nearly 15% year-on-year, reaching nearly $8.8 trillion. Local currency bond issuance in the third quarter totaled nearly $1.6 trillion, exceeding the previous quarter’s $1.4 trillion, with sales led by the PRC and Hong Kong, China. The PRC remains the largest local currency bond market in the region with outstanding bonds of nearly $5.9 trillion at the end of September.
Moving forward, the report notes that markets have largely priced in the likely interest rate hike by the US Federal Reserve in December, diminishing the risk that higher rates would prompt foreign investors to further cut their holdings of East Asian local currency bonds. However, it cautions that some downside risks remain, including banks cutting back on bond inventories, and continued slow growth in the region, which could put fiscal pressure on governments and reduce corporate profits, both of which could lead to increased risk perceptions, possible ratings downgrades, and a rise in yields.
The monitor also released findings from its annual survey which assesses liquidity conditions in emerging East Asian local currency bond markets. The survey notes that overall liquidity conditions tightened in 2015 from the year earlier with average bid-ask spreads for both government and corporate bonds up in most markets from the year earlier. Government bonds remained more liquid than corporate bonds. The results highlighted the need for greater investor diversity to help boost the liquidity of the region’s markets.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region. In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.