Asia Local Bonds’ Trade Tantrums
The Asian Development Bank’s mid-year local bond publication described unfavorable yield, debt, currency and trade trends through May, as market size in nine countries increased only 1 % in the first quarter to almost $13 trillion, 70% from China. Benchmark rates rose everywhere except China’s as the central bank cut bank reserve requirements, and all currencies dipped against the dollar aside from Korea’s as pre-summit rapprochement with the North bolstered the won. Indonesia, India and the Philippines also tightened monetary policy, with the region’s corporate and household debt buildup “exacerbating risk,” according to the ADB. Credit default swap (CDS) spreads widened in most markets as a broader sentiment indicator, and foreign ownership fell across-the-board as early year portfolio inflows turned to outflows. Emerging market turmoil outside Asia, notably in Argentina and Turkey, injected volatility and the trade battle between Washington and Beijing against the backdrop of scheduled Federal Reserve rate hikes will continue to “adversely affect” economic and financial conditions, the survey warned.
The respective government and corporate markets were $8.5 trillion and $4.2 trillion at end-March, with the bond total equal to 70% of gross domestic product. Issuance was off 10% for the second consecutive quarter, mainly due to phasing out of Chinese local government refinancing. Indonesia’s near 40% international ownership portion was pared most on “vulnerability concerns,” followed by reductions in Malaysia and Thailand. As the rupiah depreciated Indonesia’s central bank lifted the policy rate 50 basis points in two meetings as yields on the 2-year benchmark instrument spiked. Malaysia hiked 25 basis points as early as January ahead of elections, and the Hong Kong Monetary Authority was forced to intervene under the currency board regime when the local dollar weakened. China defied higher yields as growth is set to moderate to 6.5% this year in the ADB forecast, and Bloomberg’s Global Bond Index announced the addition of Yuan-denominated sovereign and state bank offerings. According to the document world economy “momentum” explains upward rates more than inflation, which is projected at a relatively stable 3% in developing Asia in 2018 and 2019
In April Indonesia, Malaysia and Thailand experienced bond and stock outflows, and India and the Philippines were bottom currency performers on worsening current account deficits. Indonesia’s CDS premium jumped 35 basis points on financial risks, while Malaysia’s bump was primarily on political uncertainty as the historic opposition party administration took power. The ten ASEAN bond markets at close to $1.5 trillion combined led first quarter growth at an over 3% clip, with Thailand’s largest $365 billion one driven by corporate activity. Malaysia continued to dominate the no-interest Islamic sukuk space, with $200 billion outstanding or 60% of the total. Singapore mounted a state company infrastructure push in its $285 billion market, and Vietnam as the smallest at $50 billion had the fastest 8.5% uptick on a central bank placement program to sterilize foreign reserve inflows. Korea’s second ranking $1.2 trillion corporate segment was popular with foreign investors, as geopolitical tensions faded with a landmark meeting between the two Korean leaders. Philippines’ issuance shrank the most in the first quarter, down one-third to $6 billion, after a large retail buyer outreach the previous three months. However intra-regional local currency transactions doubled to $11 billion for the period, 80% of them from China and Hong Kong in their respective denominations, but also including Thai baht power company ones from Laos.
From January-April in contrast external bond hard currency volume in dollars, euro and yen was up 12% over 2017 to almost $120 billion, with only Korea and Malaysia declining. China approached 60% of the total, but offshore activity was flat with access curtailed for riskier names under Beijing’s deleveraging campaign. The ADB noted that after floating $25 billion in “green” bonds last year Chinese emphasis is on carbon emission control projects, and new certification principles under consideration in ASEAN should expand this version regionally. In Korea banks and insurers were large participants, Indonesia placed sukuk abroad, and a Vietnamese corporate returned to the market for the first time in five years. With sudden interest there, the securities regulator in Hanoi imposed a margin lending policy, aimed at individual investors requiring a 60 minimum deposit, as Asian bonds otherwise feature less margin for gain into the second half.
