now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Treasury & Capital Markets
Improved growth prospects drive LCY bond yields
Local currency (LCY) bond yields in most emerging East Asian markets were up between June 1 and August 15 this year on the back of improved growth prospects in both emerging East Asia and globally.
Chito Santiago 15 Sep 2017

Local currency (LCY) bond yields in most emerging East Asian markets were up between June 1 and August 15 this year on the back of improved growth prospects in both emerging East Asia and globally.

The latest Asia Bond Monitor published by the Asian Development Bank (ADB) on September 15 shows that yields on two-year and 10-year LCY government bonds edged up in most emerging East Asian economies during the review period, tracking the rising yields in advanced economies.

Hong Kong witnessed the largest yield increase on both two-year and 10-year government bonds, reflecting the higher yields in the US as well as the stronger domestic growth prospects.

South Korea saw a larger increase in short-term yields than in long-term yields with a 15bp rise on two-year government bonds. In the Philippines, the two-year yield rose barely by 1bp and the 10-year yield went up 8bp.

Singapore tracked the US yields, while higher yields in Malaysia were largely driven by investor pessimism associated with soft oil prices. In China, the yield on 10-year government bonds increased, while the yield on two-year government bonds fell as the authorities stabilized market liquidity in June through reverse repurchase agreements and lending facilities operations.

But there were exceptions to the yield uptrend as demonstrated in Indonesia, Thailand and Vietnam where the yields have continued to decline since the beginning of 2017.

While the declines earlier this year were generally underpinned by positive sentiment, the ADB says market specific factors contributed to the discrepancy in bond yield movements between June 1 and August 15 in the three markets compared with the other emerging East Asian markets.

Yields fell in Indonesia on the back of market optimism and strong capital inflows following a rating upgrade by S&P Global in May this year. In Thailand, strong foreign investment pushed down both the two-year and 10-year bond yields. Vietnam manifested the largest yield drop as the central bank lowered the policy rate by 25bp on July 10.

Meanwhile, the size of the LCY bond market in emerging East Asia continued to expand in the second quarter of 2017, with the outstanding volume rising to nearly US$11 trillion at the end of June. Total issuance surged 27% quarter-on-quarter to almost US$1.09 trillion in the second quarter from US$852 billion in the previous quarter. The accelerated growth was due to the rebound in total issuance in both the government and corporate bond markets following the quarter-on-quarter contraction in the first three months of 2017.

China continued to lead the region with outstanding bonds of around US$7.66 trillion, or 69.9% of the total volume at the end of June. Government bonds rose 5.8% quarter-on-quarter during April-June as a result of the higher issuance quotas granted to local governments this year as they continue to refinance debt.

South Korea was the next largest LCY bond market with the outstanding bonds amounting US$1.87 trillion. Both government and corporate bonds contributed to the higher volume. The government continued to frontload bond issuance to boost economic growth and generate employment through public spending, while the corporates were taking advantage of the low borrowing costs amid expectations that the Bank of Korea may soon raise its policy rate.

Thailand, on the other hand, suffered a decline in LCY bond market size to US$323 billion – the only emerging East Asia jurisdiction to post a quarter-on-quarter contraction. In April, the Bank of Thailand reduced its issuance of short-dated tenors to help abate the capital inflows amid the appreciation of the Thai baht.

In terms of foreign holdings, further gains in foreign holding share of LCY government bonds were noted in the second quarter of 2017 as investor sentiment toward emerging East Asia’s bond market remained bullish as the global growth continued to strengthen.

The share of non-resident holdings climbed the fastest in Thailand, rising 1.5 percentage points to comprise 16.2% of the total LCY government bonds at the end of June. Foreign investors continued to shore up their holdings by shifting to long-dated bonds amid the strong appreciation of the Thai baht.

Malaysia also experienced a notable increase in the foreign holdings share of LCY government bonds, gaining 1.4 percentage points to reach 27% at the end of June. Foreign investors returned to Malaysia’s bond market as the ringgit stabilized and measures were put in place to promote onshore liquidity and enhance further development of the financial market.

With the economic prospects generally benign, the ADB notes the financial risks are receding in emerging East Asia, but downside risks loom over a long-time horizon. These include the normalization of the US Federal Reserve’s balance sheet, which signals an eventual turn in the global liquidity environment and a possible correction in rising asset valuations.

Conversation
Alexander Chan
Alexander Chan
head of ESG client strategies, Asia Pacific
Invesco
- JOINED THE EVENT -
Webinar
Sustainable investing - the new market standard
View Highlights
Conversation
Hugh Wu
Hugh Wu
vice president, global treasury
Lenovo
- JOINED THE EVENT -
Exclusive roundtable
Unlocking the potential of sustainable supply chains
View Highlights