East Asia local currency bond market expands to $5.2 trillion

MANILA, Philippines - Emerging East Asia’s local currency (LCY) bonds grew to $5.2 trillion in 2010 after registering double-digit growth in the past two years, according to the Asian Development Bank (ADB).

The same trend is expected to occur for 2011 from initial reports, it added.

The bond market – or fixed income market – is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market, usually in the form of bonds.

The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. Traditionally, the bond market was largely dominated by the United States, but today the US is about 44 percent of the market.

In previous decades, significant developments have taken place in local currency bond markets, but intra-regional financial flows remain relatively small.

“A more active intra-regional bond market would help channel regional resources to regional investments, leading to sustained and balanced economic growth,” it said, during the recent launch of its ASEAN+3 Bond Market Guide.

The ASEAN+3 is comprised of the 10 nations of the Association of Southeast Asian Nations, plus the PRC, Japan, and Republic of Korea.

Based on ADB data, the region’s bond market developed exponentially since 2003.

After the 2008 financial crisis, outstanding emerging East Asia’s local currency (LCY) bonds in the region grew 16.2 percent and 13.6 percent, respectively, reaching $5.2 trillion in 2010.

“This clearly shows that the LCY bond markets can now function as another financial intermediary channel in the region in addition to the banking system,” the bond market guide said.

The share of emerging East Asia’s LCY bonds in the world’s total has reached eight percent in 2010, which clearly surpasses those of the United Kingdom (2.5 percent), Germany (four percent), and France (4.8 percent).

 “Emerging East Asia LCY bonds have become an important asset class,” it pointed out.

As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding US bond market debt was $31.2 trillion according to Bank for International Settlements (BIS).

The bond market usually refers to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

The ASEAN+3 Bond Market Guide, aimed at encouraging more cross-border bond issuance and investment in the region’s local currency bond markets.

Published by the ASEAN+3 Bond Market Forum (ABMF) in collaboration with the ADB as its secretariat, the two-volume guide contains detailed information on bond market infrastructure; transaction flows, including information on matching, settlement cycles, and numbering; and the regulatory framework and market practices in the People’s Republic of China (PRC); Hong Kong, China; Indonesia; Japan; Republic of Korea; People’s Democratic Republic of Lao; Malaysia; Philippines; Singapore; Thailand; and Viet Nam.

ABMF expects the guide will increase investors’ understanding of regional bond markets. It will also assist in setting up the Asian Multi-currency Bond Issuance Program (AMBIP), which ABMF hopes to introduce by the end of 2013, including possible pilot bond issuance through the program.

In previous decades, significant developments have taken place in local currency bond markets, but intra-regional financial flows remain relatively small.

 “A more active intra-regional bond market would help channel regional resources to regional investments, leading to sustained and balanced economic growth,” the ADB said.