Emerging East Asia economies hike bond issues in Q2

MANILA, Philippines - Bond issuances in emerging East Asia increased in the second quarter, but risks lie ahead as investors shake off exposure in developing markets to prepare for the rise in interest rates in the US.

According to its latest Asia Bond Monitor, the Asian Development Bank (ADB) said outstanding emerging Asian bonds rose 4.6 percent to $8.625 trillion as of end-June from the previous quarter.

This, even as the region’s bond yields rose during the same period as investors anticipate higher earnings in the developed markets with the upcoming hike in interest rates by the US Federal Reserve.

Emerging Asia comprises China, Hong Kong, Indonesia, the Philippines, Singapore, South Korea, Thailand and Vietnam.

“Weaker growth and depreciating currencies have combined to make emerging market bonds less attractive to investors,” the Manila-based lender said in the report.

“The possibility of the Federal Reserve raising interest rates and a shift in preferences away from emerging market assets have combined to increase the risks for the region’s bond markets,” it added.

In general, bond yields rise as investors demand more for securing risky assets, such as those coming from emerging Asia. According to the ADB, yields rose in Hong Kong, Malaysia, Singapore and Indonesia.

China and the Philippines bucked the trend with lower yields during the same period.

Higher yields, however, did not deter governments and corporates from issuing more debt papers even as it meant paying more interest to bondholders.

“Five out of the nine East Asian markets recorded faster quarter-on-quarter growth in the second quarter – the PRC (People’s Republic of China), the Republic of Korea, Malaysia, Singapore and Thailand,” the report said.

Issuances from the Philippines, however, bucked the trend, declining 0.8 percent from the previous quarter.

Both government and corporate issuances posted drops as of end-June, the report said. No explanation was given for the Philippines’ performance.

The ADB said the entire region could experience more outflows once the US Fed raises rates and draws funds from emerging markets.

“Increased risk perception has led to a sell-off across emerging markets as a whole...hence, bond yields have generally risen across the region as foreign investors withdraw funds from the market,” the ADB said.