Covid-19 weighs heavily on emerging East Asia LCY bond markets
Government bond yields also declined in major advanced economies and select European markets as investors took a risk-averse approach
25 Mar 2020 | Chito Santiago

THE Covid-19 pandemic and the deepening global economic uncertainty are weighing heavily on the local currency (LCY) bond markets in emerging East Asia, with a number of governments implementing fiscal stimulus and/or monetary measures to mitigate the impact and stabilize the financial markets.

The latest issue of Asia Bond Monitor published by the Asian Development Bank (ADB) on March 25 says the Covid-19 outbreak accounted for the biggest source of uncertainty in the global economy and financial markets. At the same time, the absence of a long-term solution to the trade conflict between China and the US still challenges globalization and poses risks to the regional and global economy.

“Financial markets in the region are already feeling the brunt of the effects of the Covid-19 pandemic, with foreign investment and sector activities on the downside, coupled with the ongoing trade issues,” says ADB chief economist Yasuyuki Sawada. “Efforts to cushion the negative impacts of the pandemic through stimulus packages and monetary measures to support affected households, businesses and financial markets should continue.”

Apart from emerging East Asia, ADB notes that government bond yields declined in major advanced economies and select European markets between December 31 2019 and February 29 2020 as investors took a risk-averse approach and local industries reduced activities due to the global health situation. This resulted in equity market losses in the region, weakened currencies against the US dollar and widening credit default swap spreads. Market selloffs, which were observed in some regional bond markets in January and February, will likely continue, adds ADB.

The negative effect of the Covid-19 outbreak on the real economy and financial markets became more pronounced during the first two weeks of March. Global oil prices and global stock markets fell sharply, reflecting the growing concerns about a global pandemic.

Several central banks in emerging East Asia have cut their policy rates to mitigate the economic impact of the Covid-19 pandemic, including the People’s Bank of China, Bank of Thailand, Bank Indonesia, Bangko Sentral ng Pilipinas (BSP), Bank of Korea, Bank Negara Malaysia, Hong Kong Monetary Authority and State Bank of Vietnam. In March, the US Federal Reserve cut the rates twice, leaving its interest rates near zero, along with other measures to support financial markets.

Meanwhile, the LCY bonds outstanding in emerging East Asia amounted to US$16 trillion at the end of December 2019, up 2.4% from September 2019 and 12.5% from December 2018. This came even as the bond issuance in the region fell 9.5% to US$1.44 trillion in the fourth quarter of 2019, compared with the previous three months ended September.

Government bonds accounted for US$9.8 trillion of the total outstanding bonds in emerging East Asia as at end-December 2019, up 11.4% from a year ago, while corporate bonds contributed US$6.2 trillion, or 14.3% higher year-on-year.

China remained the largest LCY bond market in the region in 2019 with its outstanding bond stock expanding to US$12.1 trillion at the end of 2019. The corporate bond sector grew at a slightly faster pace of 4.1% in the fourth quarter, against 3.9% in the previous quarter, on the back of higher issuance from private enterprises and offerings of asset-backed securities as institutions sought to clean up their asset portfolios.

The foreign investor holdings of LCY government bonds in emerging East Asia were largely stable in the fourth quarter of 2019. The foreign holdings of Chinese bonds showed a steady growth as investors continued to be attracted to the country’s bond market amid the gradual opening up of its capital market to foreigners.

In contrast, ADB points out, the share of foreign holdings in the Philippine LCY bond market peaked in December 2018 and has since been on a downward trend despite a series of policy rate cuts by BSP in 2019. Foreign investors took profits and reduced their holdings on expectations that inflation would trend upward again.

In Malaysia, there was a significant spike in foreign holdings’ share to 25.3% at the end of December 2019 from 23% in September due to improved investor confidence. This followed the government assurance to market participants that it would reach its budget deficit target of 3.4% of the GDP for 2019, which was down from 3.7% in the previous year.

The share of foreign holdings in Indonesia in the fourth quarter of 2019, dipped marginally to 38.57% as at end-December, compared with 38.64% in September.

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