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.”
Emerging East Asia is defined as China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam.
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 China or moves by the European Central Bank to counter the threat of deflation.
Asia can mitigate these risks only by taking the lead in implementing better regulation and oversight of the financial system, says the ADB.
Yields and size
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 Vietnam. 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 US$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.
Vietnam’s was the fastest growing market on a quarterly basis, while Indonesia’s market grew fastest on an annual basis.
Thailand had US$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 China's recent decision to auction RMB15 billion worth of sovereign bonds in Hong Kong as part of its efforts to internationalize the renminbi.
The recent decision to allow municipalities to sell bonds provides an additional set of instruments for investors.
Among other developments, Korea lifted the final hurdle to the issuance of covered bonds, Singapore launched the clearing of non-deliverable interest rate swaps, and Hong Kong continued to promote local understanding of sukuk (Islamic bonds).