Asia Local Bonds’ Yanked Yields

The Asian Development Bank’s March regular survey of nine domestic bond markets, with insights from the last quarter of 2017 through February, alerted the region to higher long-term government yields and private financial stability concerns around global central bank liquidity retreat and economic growth uptick. Market size topped $12 trillion at year-end, and mainland China accounted for half of final quarter issuance as the government-corporate split stayed 65%-35%. It is 70% as a portion of East Asia GDP, and net overseas investor inflows were strong, with Malaysia in particular benefiting while Korea was the exception with outflows. From December- February 10-year instrument rates rose everywhere but in Vietnam’s smallest $50 billion. market.

The report suggested that Japan’s March decision previewing 2019 monetary policy “normalization” with the US and EU would reinforce this trend, alongside the region’s steeper 3% inflation forecast with another year of 6%-range output expansion. It noted that 2-year yields briefly fell with portfolio rebalancing, and that Malaysia’s foreign ownership share increased to 30% as the central bank hiked rates in January. Tightening will support currencies but hurt stocks as valuations also adjust to better reflect corporate earnings, and investors “closely monitor” listed company debt-equity ratios. The ADB warned at the same time that rapid corporate bond and household loan accumulation could dent consumption and balance sheets and pose financial crisis risk, while global trade is also under an internal and external competitive and policy vise. It urged greater deleveraging and anti-inflation stances for more solid medium-term bond markets even as the current “foundation” is intact, and cited studies associating private debt overhang with asset price and growth collapse.

China is 70% of the total outstanding and quarterly growth has been around 5% as officials impose credit restraint, including a local government placement ceiling. Second place Korean activity was flat after the central bank lifted the policy rate in November. Thailand is ASEAN’s largest market at $350 billion, with Malaysia slightly behind as the Islamic sukuk leader at 60% of its volume often for infrastructure projects. Indonesia is half as large at $185 billion, with shariah-compliant central bank bills a main offering. The Philippines $110 billion market increased most among the group in the final 2017 quarter, with retail Treasury bonds diversifying from traditional institutional auctions. Corporate activity is minimal there as well as in Indonesia and Vietnam at amounts under $30 billion. On an annual basis East Asia’s local currency pile was up 12%, with Indonesia’s 40% foreign share the highest after another BBB sovereign ratings upgrade in December. At the other extreme international ownership is just 3.5% in China, and 11% in Korea, where outflows spiked on end-year maturities and rate hike expectations.

Cross-border transactions in local currency, mostly from China and Hong Kong topped $4 billion in the last quarter, with the Korea Development Bank the single biggest name active in multiple denominations. The Government of Laos completed a $450 million operation in Thai baht and the hydroelectric Nam Ngum 2 Power Project tapped the same pool as the country accounted for 15% of the total. Malaysia’s Maybank sold $150 million in Chinese renimbi and Hong Kong dollar bonds, and Singapore dollar and Philippine peso-denominated ones from other jurisdictions also featured.

Emerging Asia issuance in G-3 currencies was a record $350 billion last year, up from $215 billion in 2016.  The dollar was the 90% choice, and Chinese companies led the pack with $225 billion outstanding although most ASEAN members also participated. China completed a $2 billion sovereign dollar issue, the first in fifteen years, without a credit rating. In China and Korea banks and real estate firms were the most prominent by sector, while Malaysia stood out as a decliner with its ban on offshore ringgitt trading. Spreads were unchanged between prime and low-rated companies over the period, but in a cited initiative Thailand’s securities commission introduced new investor protections in case of default. As the size spectrum from China to Vietnam announced annual borrowing plans, several bilateral and multilateral cooperation pacts on information sharing, trading and currency settlement were inked, according to the review. They may as well be precautionary, and a form of joint leverage against the ADB’s predicted financial version.

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