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    Asia Bond Monitor: November 2014
    Asia Bond Monitor: November 2014
    Asia Bond Monitor: November 2014
    Ebook222 pages1 hour

    Asia Bond Monitor: November 2014

    By Asian Development Bank

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    About this ebook

    The Asia Bond Monitor (ABM) reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. The ABM covers the 10 Association of Southeast Asian Nations member countries plus the People's Republic of China; Hong Kong, China; and the Republic of Korea.
    LanguageEnglish
    PublisherAsian Development Bank
    Release dateNov 1, 2014
    ISBN9789292547981
    Asia Bond Monitor: November 2014

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      Book preview

      Asia Bond Monitor - Asian Development Bank

      ASIA BOND MONITOR

      November 2014

      © 2014 Asian Development Bank

      All rights reserved. Published in 2014.

      Printed in the Philippines.

      ISBN 978-92-9254-797-4 (Print), 978-92-9254-798-1 (e-ISBN)

      ISSN 2219-1518 (Print), 2219-1526 (e-ISSN)

      Publication Stock No. RPS146979-2

      Cataloging-in-Publication Data

      Asian Development Bank.

      Asia Bond Monitor—November 2014.

      Mandaluyong City, Philippines: Asian Development Bank, 2014.

      1. Regionalism.           2. Subregional cooperation.           3. Economic development.           4. Asia.

      I. Asian Development Bank.

      The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

      ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.

      Use of the term country does not imply any judgment by the authors or ADB as to the legal or other status of any territorial entity. Asia refers only to ADB’s Asian member economies.

      ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB.

      Photo credits: Cover photos from ADB photo library and Angelica Andrea Cruz.

      6 ADB Avenue, Mandaluyong City

      1550 Metro Manila, Philippines

      Tel +63 2 632 4444

      Fax +63 2 636 4444

      www.adb.org

      For orders, please contact:

      Public Information Center

      Fax +63 2 636 2584

      adbpub@adb.org

      The Asia Bond Monitor (ABM) is part of the Asian Bond Markets Initiative (ABMI), an ASEAN+3 initiative supported by the Asian Development Bank. This report is part of the implementation of a technical assistance project funded by the Investment Climate Facilitation Fund of the Government of Japan.

      This edition of the ABM was prepared by a team from the Office of Regional Economic Integration (OREI) headed by Iwan J. Azis and supervised by OREI Director Arjun Goswami. The production of the ABM was led by Thiam Hee Ng and supported by the AsianBondsOnline (ABO) team. ABO team members include Angelica Andrea Cruz, Russ Jason Lo, Carlo Monteverde, Rachelle Paunlagui, Roselyn Regalado, and Angelo Taningco. Mitzirose Legal and Maria Criselda Lumba provided operational support; Kevin Donahue provided editorial assistance; and Principe Nicdao did the typesetting and layout.

      How to reach us:

      Asian Development Bank

      Office of Regional Economic Integration

      6 ADB Avenue, Mandaluyong City

      1550 Metro Manila, Philippines

      Tel +63 2 632 6688

      Fax +63 2 636 2183

      E-mail: asianbonds_feedback@adb.org

      Download the ABM at

      http://www.asianbondsonline.adb.org/documents/abm_nov_2014.pdf

      The Asia Bond Monitor—November 2014 was prepared by ADB’s Office of Regional Economic Integration and does not necessarily reflect the views of ADB’s Board of Governors or the countries they represent.

      Contents

      Emerging East Asian Local Currency Bond Markets: A Regional Update

      Emerging East Asian Local Currency Bond Markets: A Regional Update

      Highlights

      Bond Market Outlook

      Emerging East Asia’s bond markets remained relatively unaffected as global financial market turmoil impacted other emerging markets in 3Q14.¹ A weaker global economic outlook combined with the end of quantitative easing in the United States (US) has generated increased volatility in financial markets, particularly currency markets. Amid elevated market uncertainty, the US dollar has appreciated on the back of a relatively stronger economic performance in the US and an expected rise in interest rates as quantitative easing ends.

      Emerging East Asian 10-year bond yields generally exhibited a downward trend between July and October. Viet Nam’s 10-year bond yields dipped the most, dropping 235 basis points (bps) on lower inflation. Other economies with large declines in 10-year bond yields were the Republic of Korea, Thailand, and the People’s Republic of China (PRC), where yields fell 51 bps, 48 bps, and 26 bps, respectively. On the other hand, 10-year bond yields in the Philippines rose 10 bps amid elevated inflation.

      Most of the region’s currencies weakened against the US dollar between July and October. The Korean won experienced the largest decline, depreciating 5.7% against the US dollar. Currencies in Singapore and the Philippines depreciated 3.2% and 2.9%, respectively. In contrast, the PRC and Viet Nam saw the value of their currencies strengthen 1.4% and 0.2%, respectively.

      The risks to the region’s local currency (LCY) bond markets are rising, including (i) tightening liquidity in the region’s corporate bond market; (ii) a weaker property market in the PRC that might limit the ability of some property companies to service debt obligations; and (iii) an earlier-than-expected rate hike in the US that could raise borrowing costs and lead to the further appreciation of the US dollar.

      LCY Bond Market Growth in Emerging East Asia

      The LCY bond market in emerging East Asia continued to expand in 3Q14, reaching US$8.2 trillion at end-September. Government bond markets accounted for about 60% of the total at US$4.9 trillion, representing an increase of 3.2% quarter-on-quarter (q-o-q) and 11.3% year-on-year (y-o-y). LCY corporate bonds outstanding reached US$3.3 trillion at end-September on growth of 2.9% q-o-q and 11.3% y-o-y.

      The PRC’s bond market remained the largest in the region in 3Q14, accounting for 63% of the total market at end-September, followed by the Republic of Korea and Malaysia.

      As a share of gross domestic product (GDP), the size of emerging East Asia’s LCY bond market was broadly unchanged at 59.4% in 3Q14, compared with 59.2% in 2Q14. In 3Q14, the Republic of Korea and Malaysia had the highest ratios of bonds to GDP at 119.9% and 102.1%, respectively. In contrast, Indonesia (15.3%), Viet Nam (20.9%), and the Philippines (37.0%) had the smallest shares of bonds to GDP in emerging East Asia.

      Structural Developments in LCY Bond Markets

      The shares of foreign holdings in LCY government bond markets have been generally stable across emerging East Asia, except in Indonesia and Malaysia. In Indonesia, the share of foreign holdings in the LCY government bond market climbed to 37.3% at end-September from 35.7% at end-June. In Malaysia, foreign holdings as a share of the total LCY government bond market rose to 32.0% at end-June from 30.8% at end-March.

      The shares of foreign holdings in LCY corporate bond markets pale in comparison with those in government bond markets in Indonesia and the Republic of Korea. The share of foreign holdings in the LCY corporate bond market in Indonesia rose 1 percentage point in 3Q14 to 8.8%, while the share remained negligible in the Republic of Korea at less than 1% in 2Q14.

      In September, net foreign capital flows in bond markets in select emerging East Asian economies remained positive, but at smaller amounts compared with previous months.² Indonesia is the only market where foreign capital flows have been consistently positive in 2014, reflecting the rising share of foreign holdings in the LCY government bond market.

      LCY Bond Yields

      LCY government bond yields fell in most markets in the region between end-June and end-October. In some of the region’s more developed markets (Singapore and Hong Kong, China), the fall in yields tracked US interest rate movements, while in other markets such as the PRC, the Republic of Korea, and Thailand, yields fell mostly due to slowing inflation. In the case of the Philippines, the yield curve’s performance was mixed, falling at the longer-end as inflation expectations moderated. In Indonesia, the fall in yields was driven by expectations of a reduced supply of bonds in 4Q14.

      The 2-year versus 10-year spread narrowed in most markets due to (i) much larger declines in longer-dated yields that tracked falling US yields, and (ii) the influence of easing inflation.

      Special Section: AsianBondsOnline Bond Market Liquidity Survey

      AsianBondsOnline conducts an annual bond market liquidity survey to provide market participants and policy makers with a comprehensive view of liquidity conditions in individual markets in emerging East Asia. The 2014 survey was undertaken through interviews and email questionnaires conducted in July–September.

      LCY bond markets in emerging East Asia remained resilient, with most market participants noting improving liquidity conditions in 2014 compared with 2013. This finding was validated by our quantitative survey results as average bid–ask spreads for both government and corporate bond markets were lower this year compared with the previous year’s survey. At the same time, liquidity in corporate bond markets continued to lag government markets.

      Market participants identified greater investor diversity as the most important structural issue as it relates to deepening liquidity in both government and corporate bond markets. The relative importance of greater diversity of the investor profile vis-à-vis other structural issues appears driven by the presence of a few investor groups that continue to dominate emerging East Asia’s LCY government bond markets.

      Global and Regional Market Developments

      Emerging East Asia’s bond markets remained relatively unaffected as global financial market turmoil impacted other emerging markets in 3Q14.³ A weaker global economic outlook combined with the end of quantitative easing in the United States (US) has generated increased volatility in financial markets, particularly currency markets. Amid elevated market uncertainty, the US dollar has appreciated on the back of a relatively stronger economic performance in the US and an expected rise in interest rates as quantitative easing ends.

      In contrast, the latest economic indicators from the eurozone indicate slower growth and dangerously low inflation. With the eurozone flirting with deflation, there is increasing pressure on the European Central Bank to take more

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