Asia Bond Monitor: March 2016
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Asia Bond Monitor - Asian Development Bank
Emerging East Asian Local Currency Bond Markets: A Regional Update
Highlights
Bond Market Outlook
Bond yields in most emerging East Asian markets declined between the start of the year and mid-February amid mounting gloom over global growth prospects.¹ The main exceptions to the downward trend were the People’s Republic of China (PRC) and Hong Kong, China. Bond yields also fell in major advanced economies due to subdued inflation and concerns over deflation in some economies.
With growth momentum in the United States (US) slowing, the US Federal Reserve held interest rates steady in January following the first rate hike in 9 years in December. In the eurozone, growth remained lackluster and the European Central Bank decided to continue its quantitative easing policies in order to stave off deflation. In Japan, the economy grew by only 0.5% in 2015. In response to a sharp drop in industrial production and tepid inflation, the Bank of Japan introduced negative interest rates in January.
Yields for 10-year local currency (LCY) government bonds in emerging East Asia mostly fell between 1 January and 15 February. Over the same period, most emerging East Asian stock markets also fell, with the only exceptions being in Indonesia, where the market rose, and in Thailand, where the market held steady.
The region’s foreign exchange markets were mixed between 1 January and 15 February. The Korean won depreciated by 3.0% and the Philippine peso weakened by 1.2% against the US dollar, while the Indonesian rupiah and Malaysian ringgit appreciated by 3.3% and 3.8%, respectively. The region’s other currencies were more or less stable, with only the Thai baht appreciating by more than 1%.
Credit default swap spreads across emerging East Asia have remained volatile over the same period, mirroring the lingering uncertainty about the region’s growth prospects. Risk premiums in emerging East Asian bond markets have been on the rise as well.
Risks to emerging East Asia’s bond markets have intensified since the start of the year. The Federal Reserve may raise interest rates within the first half of the year, which could generate outflows from the region’s bond markets. However, a gradual and cautious increase in interest rates, combined with emerging East Asian bond markets having already factored in US monetary policy normalization, suggest that the adverse impacts will be limited. At the same time, the strengthening US dollar could adversely affect corporate balance sheets and exacerbate funding challenges for companies that have borrowed in US dollars. A broader loss of investor confidence in emerging markets looms as the single biggest risk.
LCY Bond Market Growth in Emerging East Asia
Emerging East Asia’s LCY bond market expanded 5.0% quarter-on-quarter (q-o-q) and 17.8% year-on-year (y-o-y) in the fourth quarter (Q4) of 2015, with the outstanding bond stock amounting to USD9,105 billion at the end of December. The three fastest growing markets on a q-o-q basis were those of the PRC; Hong Kong, China; and Malaysia—while negative q-o-q growth was recorded in Singapore.
The largest bond market in emerging East Asia remained the PRC’s, with an outstanding bond stock of USD6,150 billion at the end of December, which accounted for 67.5% of the region’s total.
The amount of LCY bonds outstanding as a share of the region’s gross domestic product rose to 63.9% in Q4 2015 from 61.7% in the third quarter (Q3) of 2015, driven by quarterly increases for both government bonds and corporate bonds. The highest ratio among all emerging East Asian economies in Q4 2015 belonged to the Republic of Korea (132.5%), followed by Malaysia (96.7%) and Singapore