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| *Data Source: Asia Bond Monitor |
Jakarta: Emerging East Asia’s local currency bond markets continue to
expand and are performing well, but risks loom large on the horizon, warned the
Asian Development Bank’s (ADB) latest Asia Bond Monitor.
“There are a number
of downside risks to the local bond markets. The US could fall over the fiscal
cliff and the new Chinese leadership has to deal with slowing growth in the
world’s second largest economy,” said Iwan Azis, Head of ADB’s Office of
Regional Economic Integration. “A surge in volatile capital inflows and rising
inflation in the region are also potential threats.”
Volatility spillovers
from mature markets to local bond markets are another major risk. The report
showed that external shocks and volatility are also increasingly being
transmitted between domestic markets and between markets across Asia as they
expand and their influence grows. This means that regulators in Asia need to
monitor and coordinate market policies nationally as well as regionally and
globally.
Bond yields fell in
most countries in the third quarter on the back of moderating inflation, strong
economic performance, and steady investor demand, with the exception of the
People’s Republic of China (PRC) where concerns over slower economic growth and
inflation have pushed yields higher.
The region’s bond
markets are, however, increasingly diverse in terms of growth rates, issuance,
and yields.
At $6.2 trillion, the region’s local currency bond market
was 3.5% bigger than at end of June 2012 and 11.0% larger than at the end of
September 2011. Government bonds continue to dominate with $4.1 trillion
outstanding at the end of September, 3.1% more than at the end of June.
Some markets, such as
Malaysia, Singapore, and the PRC saw solid growth in their government markets
over the quarter. However, those of the Republic of Korea and Hong Kong, China
grew only a tad while the markets of Indonesia and Viet Nam shrank slightly,
due to a sharp drop in issuance by monetary authorities. The amount of
Sertifikat Bank Indonesia bills outstanding fell by 23.9% on quarter while
State Bank of Viet Nam bills tumbled 62%.
Corporate bond
markets continued to expand at a faster rate than their sovereign counterparts
though with $2.2 trillion outstanding at the end of September, up 4.2% on
quarter, with most markets posting growth.
Overall, bond
issuance differed sharply between countries over the quarter, however, with
gross bond sales rising 38.1% in Malaysia, 13.0% in the Philippines, and 10.5%
in the PRC but tumbling 81.3% in Viet Nam, 25.9% in Hong Kong, China and down
8.1% in Thailand.
The report’s annual
liquidity survey showed an uptick in liquidity in both government and corporate
bonds for the region as a whole. The survey showed that increased investor
diversity, greater availability of hedging instruments, and more transparency
are key to boosting activity in emerging East Asia’s local currency bond
markets.
The Asia Bond Monitor
assesses the markets of the PRC; Hong Kong, China; Indonesia; the Republic of
Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.