MANILA, PHILIPPINES – Local and offshore demand for emerging East Asia’s local currency bonds is rising again and should continue given strong economic growth prospects in the region, said the Asian Development Bank’s (ADB) latest Asia Bond Monitor.
“Most emerging East Asia bond markets have regained their bounce,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration. “Thailand’s bonds though could buck the trend given recent political upheavals and investors there are likely to be cautious for some time.”
Despite the recent improvements, the Asia Bond Monitor warns that markets could still be jolted by the ongoing tapering in US quantitative easing, the slowdown in economic growth in the People’s Republic of China (PRC), or moves by the European Central Bank to counter the threat of deflation. Only by taking the lead in implementing better regulation and oversight of the financial system can Asia mitigate these risks.
Emerging East Asia is defined as the PRC; Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; Thailand; and Viet Nam.
Bond yields—which fall as demand increases—declined in most economies in the first four months of the year, dropping most in Indonesia, Thailand, and Viet Nam. However, investors in Thai bonds are now on the sidelines and yields could rise going forward. Meanwhile, yields in the Philippines went up in January through April amid rising inflation.
The markets also continue to grow in size with $7.6 trillion in bonds outstanding in the nine economies at the end of March, up 2.1% on the quarter and 9.5% higher than a year earlier. Viet Nam’s was the fastest growing market on a quarterly basis while Indonesia’s market grew fastest on an annual basis.
Thailand had $281 billion in outstanding baht-denominated bonds as of the end of March, 1.2% more than at the end of December 2013 and 5.7% more than at the end of March 2013.
The region also continues to see encouraging developments within the bond markets, the report says. It points to the PRC’s recent decision to auction CNH15 billion worth of sovereign bonds in Hong Kong, China as part of its efforts to internationalize the renminbi. The recent decision to allow PRC municipalities to sell bonds provides an additional set of instruments for investors. Among other developments, the Republic of Korea lifted the final hurdle to the issuance of covered bonds, Singapore launched the clearing of non-deliverable interest rate swaps, and Hong Kong, China continued to promote local understanding of sukuk.