Improving global investment sentiment and financial conditions provided a much-needed lift for local currency (LCY) bond markets in emerging East Asia, despite risks posed by the coronavirus outbreak, according to the latest issue of Asia Bond Monitor published by the Asian Development Bank (ADB) on September 25. However, foreign holdings of LCY government bonds declined due to sluggish economic performance.
ADB chief economist Yasuyuki Sawada notes that governments across the region have been agile in dealing with the impact of Covid-19 through a wide range of policy responses, including monetary easing and fiscal stimulus. “It is crucial that governments and central banks maintain accommodative monetary policy stances and ensure sufficient liquidity to support financial stability and economic recovery,” he says.
Local currency bonds outstanding in emerging East Asia reached US$17.2 trillion at the end of June, up 5% from March this year and 15.5% higher than in June 2019. As a share of regional gross domestic product, emerging East Asia’s LCY bonds outstanding climbed to 91.6% at the end of June, from 87.8% in March, due mainly to the large amount of funding needed to fight the pandemic and mitigate its impact.
The region’s government bonds outstanding reached US$10.5 trillion at the end of June and accounted for 60.8% of the region’s aggregate bond stock. Corporate bonds, meanwhile, totaled US$6.7 trillion. In the second quarter alone, bond issuance in the region reached US$2 trillion, up 21.3% from the first quarter this year.
China remained the largest bond market, accounting for 76.6% of the region’s total bond stock as of the end of June. It was followed by South Korea with a market share of 12.3% and its outstanding bond reaching US$2.1 trillion. The Asean countries had a collective share of 9.3%, or US$1.6 trillion, at the end of June, with Thailand, Malaysia and Singapore remaining as the three largest bond markets in that region.
Meanwhile, foreign holdings of LCY government bonds in emerging East Asia posted quarterly declines in the second quarter of 2020 in all economies, except in China and Malaysia. ADB attributes the downtrend to weak economic performances, protracted recoveries and uncertainty caused by Covid-19, which drove risk aversion among foreign investors. This was manifested by foreign ownership remaining at low levels or declining in most economies in the region.
China’s foreign holdings’ share for government bonds rose to 9.1% at the end of June from 8.7% at the end of March. This was underpinned by the relatively higher returns in the China bond market compared with large economies that are considered safe havens, such as the US and European markets.
The attractiveness of the China market was also due to the economy’s quick recovery from the adverse impact of Covid-19 as evidenced by its GDP growth of 3.2% in the second quarter, while most economies in the region were contracting. At the same time, the continuation of policies to open up the China bond market to overseas investors have made it easier to attract foreign funds.
In Malaysia, the share of government bonds held by foreign investors rebounded in the second quarter of this year, albeit marginally, rising to 22.7% at the end of June from 22.2% at the end of March. According to ADB, this may have been driven by ample global liquidity, coupled with Malaysia’s subdued inflation, as well as the resumption of economic activities amid an easing of the lockdown, which fueled foreign fund flows into the LCY government bond market.
Expectations that FTSE Russell would retain Malaysia in the World Government Bond Index, resulting from Bank Negara Malaysia’s efforts to improve onshore bond liquidity, may have also encouraged buying interest in Malaysia government bonds.
Risk-off sentiment among foreign investors was apparent in Indonesian and the Philippine markets in the second quarter of 2020. Indonesia’s foreign holdings remained on the downtrend, falling to 30.2% at the end of June – the lowest level in eight years. Foreign investors, ADB notes, appeared wary of holding Indonesian government bonds as demonstrated by the relatively small foreign fund inflows amid an expansion of the LCY government bond market. This resulted in Indonesia posting the largest decline in foreign holdings' share in the region in the second quarter of 2020 with a drop of 2.5 percentage points.
Foreign ownership of government bonds in the Philippines fell to its lowest level since such data have been available, dropping to 1.9% at the end of June. The share of foreign holdings posted a quarterly decline of 2 percentage points, making it the largest drop in the region in the second quarter next to Indonesia.
Thailand and Vietnam also saw falling foreign holdings in their respective government bond markets. The foreign holdings in Thailand went down to 14.4% at the end of June from 15.3% in March on the back of a weak economic outlook and continued monetary policy easing. In Vietnam, the decline was marginal from 0.7% to 0.6% during the same period, despite its success in containing the spread of Covid-19.