ADB: Emerging east Asia bond markets grow 16.5% to $4.42 trillion

By Angela McDaniels

Tacoma, Wash., March 25 - Local-currency bond markets in emerging East Asia expanded 16.5% in 2009, with $4.42 trillion in paper outstanding at the end of December, and should continue to grow in 2010, according to the Asian Development Bank's quarterly Asia Bond Monitor.

ADB includes the People's Republic of China, Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam in emerging east Asia.

Of the $4.42 trillion of outstanding paper, $2.57 trillion, or 58.14%, was issued in China. Following in the No. 2 and 3 spots were South Korea with $1.02 trillion, or 23.08%, and Malaysia with $185 billion, or 4.19%.

The bank attributed the growth in 2009 largely to rapid expansion in the markets in Hong Kong, Thailand and Indonesia.

The Hong Kong market soared 55.8% largely due to the hefty issuance of Exchange Fund bills and notes by the Hong Kong Monetary Authority for monetary policy purposes, ADB said. The Thai and Indonesian local-currency bond markets posted growth rates of 20.5% and 19.4%, respectively.

"Asia's local-currency bond markets expanded at a faster pace in 2009 than they did in 2008 in large part because most governments sold paper to finance spending to counter the ill effects of the global financial crisis," Srinivasa Madhur, senior director in ADB's Office of Regional Economic Integration, said in the report.

From 2007 to 2008, Asia's local-currency bond markets expanded 14.8% in local-currency terms, the report stated.

Emerging East Asia's share of the global bond market rose to 6.7% at the end of September from 2.1% in 1996. The share was 3.9% for China and 2.9% for the remainder of emerging East Asia.

Issuance hits $3.34 trillion

New issuance of local-currency bonds increased by 39.3% to $3.34 trillion in 2009. The growth rate was 41.8% for corporate issuers and 46.7% for government issuers excluding central banks.

Of the local-currency bond issuance in 2009, $2 trillion, or 60%, was issued by central banks, $726 billion, or 21.7%, was issued by governments and $613 billion, or 18.4%, was issued by corporations.

ADB said a 6.7% quarterly drop in government issuance in the fourth quarter suggests that sales of sovereign paper to support economic stimulus packages tailed off toward the end of 2009.

Corporate issuance grows

ADB said the corporate bond market in the region grew 31.6% last year, compared with an 11.2% annual increase in the government bond market.

The expansion of the corporate market was most pronounced in the China (77.5% growth), Vietnam (68.4%) and the Philippines (66.5%).

However, at $3.11 trillion, the total value of outstanding sovereign paper still dwarfs the $1.3 trillion market for bonds issued by companies, the bank noted.

G3-denominated deals almost double

Sales of bonds denominated in dollars, euros and yen rose to a record high of $63.2 billion, a 90% increase from the $33.3 billion posted in 2008.

The bank attributed this upsurge to the return of investor appetite for bonds of major Asian governments, corporations and financial institutions as well as the low level of U.S. interest rates and a renewed search for yield.

The total amount of foreign-currency bonds outstanding at the end of 2009 was $235 billion, a 15% increase over the end of 2008.

ADB predicted that rising demand from investors will likely spur greater issuance of Asian paper.

"Foreign investors' holdings rose in 2009 as buyers were keen to reap the rewards of Asia's swift recovery from the global downturn, which saw strengthening currencies and higher returns in several markets," the bank said, adding that holdings of bonds from Indonesia and Malaysia rose the fastest.

Returns improve

Returns improved in the latter half of 2009 after a lackluster performance in the first half of the year, ADB said.

By the end of 2009, the return on the Asian Bond Fund's Pan Asian Bond index had grown to 5% from a negligible 0.15% at the end of June 2009.

The bank said the overall improvement in returns masked a diverse performance by underlying markets.

Returns on Indonesian bonds were the highest at 35.61%, while Philippine and Korean bond returns were 11.88% and 9.73%, respectively.

However, ADB said returns for Thai and Malaysian bonds were negligible and were in fact negative in China and Hong Kong.

In addition, returns on local-currency bonds remained significantly lower than gains in the region's equity markets. The bank said the Pan Asian Bond index's 5% return in 2009 pales in comparison to the 60.3% rise of the MSCI Far East Ex-Japan index.

Outlook

"Asia is enjoying a solid recovery and governments are keeping a close watch on their debt levels," Madhur said.

"Nevertheless, we expect Asia's local bond markets to continue to grow in 2010 and beyond as the economic recovery gains traction and as companies in the region increasingly tap bond markets as an alternative funding source to bank loans."

In the bank's view, risks to the market outlook include a reversal in recovery in developed economies, premature monetary or fiscal tightening and potentially destabilizing capital inflows.

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