Asia's local bond markets grew over 16% last year

Dubai : Local currency bond markets in east Asia expanded 16.5 per cent in 2009, with $4.4 trillion (Dh16.18 trillion) in paper outstanding at the end of December, and should continue to grow in 2010, according to a recent report.

The main driver of growth last year was rapid expansion in markets in Hong Kong, China, Thailand and Indonesia, according to the Asian Development Bank's (ADB) quarterly Asia Bond Monitor.

Hong Kong's local bond market soared 55.8 per cent largely due to the hefty issuance of exchange fund bills and notes by the Hong Kong Monetary Authority.

The Thai and Indonesian local currency bond markets grew 20.5 per cent and 19.4 per cent respectively.

"Asia's local currency bond markets expanded at a faster pace in 2009 than they did in 2008 in large part because most governments sold paper to finance spending to counter the ill effects of the global financial crisis," Srinivasa Madhur, Senior Director in ADB's Office of Regional Economic Integration, which compiled the report, said in an emailed statement.

Asia's local bond markets expanded 14.8 per cent in local currency terms in 2008 versus 2007.

A 6.7 per cent quarterly drop in government issuance in the fourth quarter suggested that sales of sovereign paper to support economic stimulus packages tailed off toward the end of 2009.

Most of the issuance was done in the second and third quarters of 2009 to take advantage of low interest rates.

At the same time, sales of bonds denominated in dollars, euros, and yen rose to a record high of $63.2 billion from $33.3 billion in 2008.

Solid recovery

"Asia is enjoying a solid recovery and governments are keeping a close watch on their debt levels," Madhur said.

"Nevertheless, we expect Asia's local bond markets to continue to grow in 2010 and beyond as the economic recovery gains traction and as companies in the region increasingly tap bond markets as an alternative funding source to bank loans."

The corporate bond market in the region grew 31.6 per cent last year compared to an 11.2 per cent annual increase in the government bond market.

The expansion of the corporate market was most pronounced in China (77.5 per cent), Vietnam (68.4 per cent), and the Philippines (66.5 per cent). However, the total value of outstanding sovereign paper at $3.11 trillion still dwarfs the $1.30 trillion market for bonds issued by companies.

Rising demand from investors is likely to spur greater issuance of Asian local currency paper.

Foreign investors' holdings rose in 2009 as buyers were keen to reap the rewards of Asia's swift recovery from the global downturn, which saw stronger currencies and higher returns in several markets.

Holdings of bonds from Indonesia and Malaysia rose the fastest. Returns improved in the latter half of 2009 after a lacklustre performance in the first half of the year. By the end of 2009, the Asian Bond Fund's pan-Asian bond index was posting returns of 5 per cent compared with a negligible 0.15 per cent at the end of June.

This masked a diverse performance by underlying markets. Returns on Indonesian bonds were the highest at 35.61 per cent, while Philippine and Korean bond returns were 11.88 per cent and 9.73 per cent, respectively.

However, returns on Thai and Malaysian bonds were negligible, with negative returns in Hong Kong and China.