Asia Bonds’ Aversion Tendencies

The November edition of the Asian Development Bank’s local bond publication, reviewing the August-October quarter in nine East Asian markets, cited higher yields, currency depreciation and reduced foreign holdings as likely trends into next year against the backdrop of emerging economy “risk aversion” and developed world monetary policy adjustment. It noted that equity markets also sold off, while credit default swap spreads stayed intact on 4% quarterly growth in the group to $13 trillion, almost three-quarters from China. The ADB added that the trade fight with the US could dent “healthy” economic expansion, and an annual survey of liquidity conditions was mixed, with the absence of corporate and government bond hedging tools a main bottleneck. In advance of the next phase of the 15-year old Asian Bond Markets Initiative, it offered a retrospective tracking progress against Latin America. The work praised corporate issuance strides, but found that domestic currency regional placement remains stuck with onerous non-resident rules.

The ADB’s September economic update put gross domestic product growth below 6% in 2019 with domestic demand still “robust,” but trade conflict could be a further drag. While China continues above that threshold, ASEAN members’ advance is set at 5% and Hong Kong’s and Korea’s just 3%. Consumer price inflation will rise 0.5% to near 3% next year, with geopolitics aggravating oil cost uncertainty. In the third quarter yields rose everywhere except China and Vietnam, with the largest 150-200 basis point increases in Indonesia and the Philippines. Only the Hong Kong dollar and Thai baht appreciated during the period, while the Indonesian rupiah and Korean won depreciated 3.5%. and 2%, respectively. Credit default swap spreads inched up in Thailand and Korea, with the latter capped by ebbing tensions with the North. International ownership of local bonds dropped in all markets outside China, with the level there a small 5% in contrast with 25% in Malaysia and 35% in Indonesia, where the central bank hiked rates five times between May and September to sustain inflows.

On an annual basis market growth is almost 13%, with China’s same magnitude leap in local government special bond issuance leading the way in the quarter. Korea’s $2 trillion size was second, accounting for 15% of East Asia’s total. ASEAN combined was $1.3 trillion at end-September, with Thailand and Malaysia each around $350 billion, and Islamic-style sukuk 60% of the latter. Singapore’s $300 billion market had heavy monetary authority issuance to absorb excess liquidity, and Vietnam’s tiny $50 billion one registered improvement in the nascent corporate segment. Government bonds are still two-thirds of activity overall, with the ratio to GDP at 73%. Indonesia’s pace near doubled over the three months with the return of conventional central bank bills as of July, while the Philippines’ 38% drop was greatest without the previous quarter’s retail Treasury bond exercise.

 East Asia cross-border transactions were down 20% in the timeframe to $4 billion, with Hong Kong and mainland China 60% of the sum. Lao PDR reappeared with a $400 million deal, with the Chinese Yuan the top currency denomination. US dollar, euro and yen regional issuance slipped 9% to $220 billion through the third quarter, with the dollar the 90% preference. Chinese names including Tencent and Construction Bank were the biggest portion, and Korean state banks were also active. Indonesia’s $15 billion was one-third of the ASEAN total, and Cambodia was represented with Naga Corporation’s $300 million.

Yield curves moved up across the board with US Federal Reserve rate hikes and balance sheet shrinkage, as speculative-grade corporate offerings were shunned, the report commented. The Malaysian Securities Commission liberalized retail investor access; the Philippines central bank approved simpler placement rules; and the Thai Bond Market Association is considering digital bitcoin settlement to strengthen non-government demand. The yearly online participant and regulator survey revealed worse or unchanged liquidity in Indonesia, Korea and Malaysia, with the last “sidelined” awaiting policy direction from the re-elected Mohamed Mahathir administration. Their turnover ratios slid, as bid-ask spreads widened to almost 5 basis points. On qualitative indicators, along with missing hedging tools, the lack of investor diversity, tax clarity and repo availability were obstacles. Government bonds are tax-exempt in China, Malaysia, and Vietnam, while other jurisdictions apply 10-25% interest withholding to illustrate uneven performance and development paths ahead for more selective buyers.

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