Asia Bonds’ Serial Signal Clashes

The Asian Development Bank’s quarterly local currency bond survey of mid-year and through end-August trends noted lower yields with slower economies, amid still positive “risk off” foreign investor sentiment raising future flags. The US-China trade standoff continued to loom over regional markets cutting interest rates in line with developed world central banks. The Japan-Korea diplomatic and export clash added to aversion, as equity markets also slid and currencies weakened against the dollar. Annualized growth was almost 15% in the latest period for combined size of the nine Emerging East Asian destinations over $15 trillion, three-quarters from mainland China, and close to another 15% from Korea. A Cambodian bank bond as the third such listing on the stock exchange was a highlight as broader Indochina coverage may soon join Vietnam in the publication.

In most places the 10-year government bond yield drop surpassed the 2-year, with curve flattening suggesting economic “gloom,” the ADB commented. Korea, Malaysia and Thailand reduced benchmark rates 25 basis points, and Indonesia got a sovereign ratings upgrade to slash cost. Hong Kong’s fall was less than the rest with “political uncertainties” from months of anti-Beijing street riots. The International Monetary Fund in its July outlook predicted 2.5% trade growth this year will be half the pace of 2017. Emerging market gross domestic product expansion will be just 4%, with inflation almost a point higher. Asia’s clip is a “rock solid” 5.7%, despite Hong Kong and Korea at half that figure. Vietnam was an exception to the stock market spin in part due to possible MSCI index elevation from the frontier to core rung in 2020.

 Credit default swap spreads “rose sharply” in July, even as overseas ownership of domestic bonds was “stable,” according to the report. However Malaysia and the Philippines had 1.5% declines, with net outflows in the former on oil export price softness and potential removal from an FTSE global bond index. A new World Bank policy paper points out that East Asia is ahead of other regions in developing capital markets for a state and corporate borrowing “spare tire” since the late 1990s financial crisis, although the private sector can be “crowded out” and small and midsize company access lags. The update warns that Chinese growth “moderation” is a bigger risk than US recession, while multiple trade conflicts rage. While the Federal Reserve reversed course toward lower interest rates, major emerging market upsets elsewhere, such as in Argentina and Turkey, can still readily translate into asset class selloffs, it added.

The government-corporate bond divide is 60%-40%, and overall growth was 3.5% in the second quarter, roughly the same increase as in mainland China. In contrast Hong Kong’s outstanding amount slipped slightly to $250 billion, while ASEAN’s combined was up 2% to $1.5 trillion. Thailand leads there at $425 billion, followed by Malaysia’s $350 billion and Indonesia’s $220 billion. In Malaysia 60% of volume is Islamic-style sukuk, and Singapore’s $320 billion market is also moving into this niche. The Philippines and Vietnam are minnows at $125 billion and $50 billion respectively, although Manila stands out with a retail investor program. As a fraction of regional GDP the total is near 85%, with Korea the outlier with a 125% proportion. The foreign investor share ranges from 5% in China to almost 40% in Indonesia, with net buying over the April-July timeframe.

 Cross-border Asian placement was $3.5 billion, with China names accounting for half. Bank of China had the single biggest $750 million issue in Hong Kong dollars, and denominations in Singapore dollars, Korean won and Malaysian ringgit were 5% of activity. Hard currency East Asia offerings climbed 20% from January-July to over $200 billion, 90% in the greenback. Indonesia was responsible for $12 billion; Thailand $1.5 billion; and Vietnam Prosperity Bank completed a $300 million bond. Cambodia’s Advanced Bank local listing had a 7.75% coupon above bank term deposits, with the proceeds going to more speculative rural business. It got a “B” Standard & Poor’s rating to facilitate institutional and individual sale, with over 20,000 investors now registered on the $150 million exchange. The small bourse is on the radar screen especially of Indochina specialists already in Vietnam, and eying fresh spots with the announced merger of the Hanoi and Ho Chi Minh markets, under the caveat that “rock solid” may also describe boulder dangers.

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