Covid cuts local currency bonds appetite in region

THE resurgence of Covid-19 cases in the region has dampened investor sentiment for local currency bonds in the second quarter of the year, according to the Asian Development Bank (ADB).

In its latest Asia Bond Monitor report, the Manila-based multilateral development bank said almost all countries in the region experienced declines in long-term bond yields between June 15 and August 27.

However, data showed outstanding local currency bonds increased 2.9 percent, faster than the 2.2-percent growth posted in the rst quarter this year.

“The emergence of Covid-19 variants and renewed mobility restrictions in some places are sti ing the earlier momentum toward a sustained recovery,” said ADB Acting Chief Economist Joseph Zveglich Jr. “However, nancial conditions in emerging East Asian economies remain stable, even as they cope with the continuing uncertainty.”

Nonetheless, ADB said the Philippines and Singapore bucked the trend and managed to see bond yields increase for the 10-year government bond yields.

The report said the 10-year yield rose in the Philippines as the economy recorded 11.8-percent GDP growth in the second quarter this year, after posting a decline of 3.9 percent in the rst quarter of 2021.

“On August 10, the Bangko Sentral ng Pilipinas said that it had yet to consider reducing the reserve requirement ratio. In ation in the Philippines also remains elevated, and while it has trended downward in June, it spiked again to 4.9 percent y-o-y [year on year] in August,” the report, however, stated.

The local currency bond market weakened as overall stock grew 2.5 percent to $191.6 billion at the end of June. On an annual basis, the market expanded 25.1 percent.

Based on the data, the composition of the country’s local currency bonds were mainly government bonds which accounted for 83.8 percent of the total stock. It posted a growth of 3.9 percent on a quarterly basis.

The corporate bond segment’s decline steepened to 3.9 percent as market sentiment remained subdued due to mobility restrictions. Corporate bonds outstanding decreased to $31.1 billion.

Meanwhile, local currency bond markets in emerging East Asia grew to $21.1 trillion at the end of June, driven by the continuing increase in government bond issuance.

Government bonds increased 3.3 percent to $13.1 trillion, compared with 2.1-percent growth in the previous quarter.

“Some central banks have used smallscale asset purchase programs to improve bond market liquidity and boost private investor con dence. Long-term debt is making up more of the region’s local and foreign currency debt structure, and the region’s sustainable bond markets are expanding,” Zveglich said.

ADB said growth in sustainable bonds in Asean economies jumped to 30.4 percent from 0.6 percent in the prior quarter, reaching $23.6 billion at the end of June.

Sustainable bonds in the Asean region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea totaled $345.2 billion, equivalent to 19 percent of global sustainable bond stock.

Green and sustainability bond issuance in the region during the rst half of 2021 exceeded the issuance for all of 2020.

ADB said market risks remain rooted in the resurgence of Covid-19 and its impact on the region’s economic recovery.

Coupled with a strong recovery in the United States, this could push further capital out ows and local currency depreciation that will increase external debt burdens. Potentially higher US bond yields could spill over to the region and increase local currency nancing costs.