The future of bond markets is hazy, and investors must calculate risks cautiously. Photo: iStock
Global corporate profits are expected to accelerate over the next 12 months for the first time since August 2018 and the trade war resolution will trigger a full capex cycle taking the global PMIs back to prior highs, according to a BofA Global Fund Manager Survey issued on Wednesday.

The Asian Development Bank’s November local-bond monitor covering the third quarter in nine East Asian government and corporate markets showed “strong” 11.5% annualized growth to US$11.5 trillion in total, but also pointed to higher yields and foreign-capital outflows at the end of the period amid lingering qualitative and quantitative liquidity concerns.

Balance-sheet normalization by advanced-economy central banks and increased expansion of global gross domestic product have not affected financial-market stability, but “potential risks” encompass monetary policy and structural features, including the lack of hedging instruments, the ADB says.

China continues to dominate regional markets with a two-thirds share, and bond size to GDP is now 70%, with South Korea and Malaysia leading the pack under that measure.

October international selloffs were pronounced in Indonesia and Thailand, as East Asia still struggles to diversify the investor base, according to the report.

A periodic liquidity survey found an even split between economies improving and stagnating, with Hong Kong, Vietnam and Singapore in the former and the Philippines in the latter.

The ADB warned that dealing amounts and spreads suggest longer-term bottlenecks that could aggravate overseas sentiment turn as the current return “chase” abates.

Vietnam was the exception, as two- and 10-year government bond yields fell after an interest-rate cut by the central bank.

In China, deleveraging raised costs beyond developing Asia’s better growth outlook, with the ADB prediction at 6% this year on 2.5% consumer inflation.

The marginal uptick has not punctured the simultaneous stock-market rally, with emerging Asia up 35% on the MSCI index as world interest rates and volatility remain low on “solid” corporate earnings, particularly in the technology sector.

A periodic liquidity survey found an even split between economies improving and stagnating, with Hong Kong, Vietnam and Singapore in the former and the Philippines in the latter

Foreign ownership of local debt jumped to 40% in Indonesia after a sovereign-rating upgrade, and most currencies depreciated slightly against the US dollar, outside a 1% gain by the Malaysian ringgit.

Domestic bond issuance rose 4% from the second quarter, and South Korea solidified its No 2 position as the market size approached $2 trillion. Malaysia and Thailand are next at $300 billion, with Islamic sukuks 60% of Malaysia’s total. Indonesia and the Philippines are in the respective $200 billion and $100 billion ranges, and Vietnam is the smallest at $50 billion with a negligible corporate segment, which is one-third regional activity on average.

China, which just opened the government market, has the lowest non-resident share at 3%, followed by South Korea at 10%, where portfolio outflows accompanied military threats from the North.

Chinese firms led in regional cross-border placements with $1.5 billion, while Malaysia’s Maybank and national mortgage company Cagemas had the biggest single transactions in Chinese yuan and Singapore dollars. East Asia offerings in the US dollar, euro and yen reached US$250 billion through the third quarter, already 10% ahead of full-year 2016, with mainland China and Hong Kong sponsors accounting for 75% of volume.

Bond-market-related policy and regulatory shifts were notable over the period, including a repo launch in the Philippines; a cooperation pact between securities supervisors in China and Singapore; foreign-company authorization for Thai baht-denominated issuance; and approval of a medium-term capital-market development plan in Vietnam.

These changes were incorporated into interviews with fixed-income sales and research desks, asset managers and strategists, and official overseers across the nine economies to determine prevailing liquidity conditions.

By turnover ratio, only Thailand, Hong Kong and Indonesia were over 0.5 for the quarter as active markets, while bid-ask spreads reduced by 5 basis points. Average government-bond trade size decreased from a year ago to $5 million, with tightening most prominent in China and South Korea, the largest markets, because of respective non-bank crackdowns and geopolitical drags.

Respondents also highlighted structural weaknesses in rank order, from the lack of derivatives and private institutional investors to onerous custody and settlement and tax treatment. Malaysia was singled out as scoring well overall but damaged by recent restrictions on offshore currency hedging.

Withholding tax is steepest in Indonesia and the Philippines at 15-20%, while Vietnam is in the earliest stage of derivatives development.

On the corporate side, secondary markets do not exist in the Philippines and Vietnam and liquidity is otherwise “subdued.” Transparency has improved, with available and accurate pricing and financial data through dedicated platforms, but capital and access controls are uneven and may become choppier should bond performance sour in coming months and further compromise category outcomes, the survey implies.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.