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Asia’s Bonds Pressured by Interest Rate, Currency Concerns – ADB Report

Sep 16, 2015 (LBO) – Bond markets in emerging Asia came under pressure in the past quarter amidst concerns over softer growth, depreciating currencies, and US interest rates, ADB says.

“Asian bond markets were buffeted by strong headwinds, including anticipation of the US Federal Reserve rate hike, which has led to an outflows of funds in some countries,” Shang-Jin Wei, chief economist said in the Asian Development Bank’s latest Asia Bond Monitor.

“The uncertainty in global bond markets points to the need for continued efforts to strengthen local currency bonds, which together with prudential regulations, can improve a country’s resilience to foreign monetary and financial shocks.”

The report notes that an improved US economic outlook could see the US Federal Reserve raise interest rates as early as September, although the monetary authority may take a more cautious approach given recent weakness in developing economies and declining oil prices.

Meanwhile in Asia, currency depreciations pose threats to corporates with large amounts of foreign currency denominated debt, while further falls in commodity prices could hurt highly leveraged companies in the sector, it said.

“As a result, yields which move inversely to prices of local currency bonds spiked in a number of markets including Indonesia and Malaysia, which have a large number of foreign investors,”

“At the same time, some markets, including the Peoples Republic of China (PRC), the Republic of Korea, and Thailand saw yields dip, as authorities took steps to soften monetary policy in the face of weak growth outlooks.”

In the currency markets, the report says adjustments by the People’s Bank of China to the mechanism that sets the middle point for daily open exchange rates led to a 3.1 percent drop in the value of the renminbi against the US dollar between 1 June and 14 August, while the Malaysian ringgit fell 10.7 percent, the Republic of Korea won 6.3 percent, and the Thai baht 4.5 percent.

Despite some risk aversion by investors, East Asia’s local currency bond market grew to 8.6 trillion US dollars at end-June, from around 8.3 trillion US dollars at end-March.

As a share of gross domestic product (GDP), the size of emerging East Asia’s local bond market reached 59.5 percent at end-June from 57.7 percent at end-March, lifted by an increase in the size of government bonds relative to GDP.

Local currency bond issuance rose to over 1.4 trillion US dollars in the second quarter, from 958 billion US dollars in the first, led by increased issuance from the PRC; Hong Kong, China; and the Republic of Korea.