Emerging East Asia’s local currency bond markets have expanded at a slower pace in the third quarter but still remain attractive despite the European debt crisis and Asia’s economic slowdown, a report said Tuesday. At the end of September, the region had $5.5 trillion in outstanding bonds — 5.5 percent more than a year earlier in local currency terms, the Asian Development Bank said in its Asia Bond Monitor.
That compared with a year-on-year growth rate of 7.6 percent at the end of the second quarter of 2011. Despite a slower growth, Asia’s low debt levels, strong economic fundamentals and yields compared to bonds of developed markets “contribute to the attractiveness of local bonds,” said Iwan J. Azis, head of the ADB’s Office of Regional Economic Integration.
Risks include uncertainties over Europe’s debt crisis, which is generating market volatility and a flight to safe-haven investments, and a slowdown in Asian growth. China has the largest local currency bond market in emerging East Asia with $3.2 trillion in bonds outstanding at the end of September, while Vietnam was the fastest-growing local currency bond market in the third quarter, expanding 22.2 percent on year to $17 billion.
A total of $829 billion in bonds were issued the third quarter, up 7.6 percent from the second quarter — but down 19.9 percent year-on-year as central banks reduced sales to offset foreign exchange inflows.
Corporate issuance was also down 24.4 percent on a year-on-year basis. This decline, however, was from extraordinarily high levels in 2010, according to the ADB. Some countries, like Thailand, have started to issue local government bonds and bonds for local government-owned companies. China has approved bond issues by the municipal government of Shanghai and the province of Guangdong.
Yield curves in most markets have flattened and in some cases shifted downwards as markets and policymakers focus on supporting growth rather than stemming inflation, the report said.