Risks intensify for Singapore’s stellar bond market growth

Higher US rates pose a big problem.

Singapore is the fastest-growing market in emerging East Asia for local-currency bond market, the Asian Development Bank’s latest Asia Bond Monitor released today. However, a number of risks remain for the region's bond markets.

According to the report, emerging East Asia’s local currency bond markets are resilient but a faster-than-expected US interest rate hike and a stronger dollar could pose problems.

“Higher US rates and a stronger dollar could prove to be a challenge given increased foreign holdings of Asia’s bonds, which could easily reverse, and record US dollar bond issuance by the region’s companies,” said Iwan J. Azis, head of ADB’s Office of Regional Economic Integration.

US dollar debt becomes more expensive to service in local currency terms when the dollar appreciates.

Markets are currently anticipating that the US Federal Reserve will increase interest rates in June 2015 but recent economic data suggest the economy is improving faster than anticipated.

The US dollar, meanwhile, has appreciated against most emerging East Asian currencies recently, and monetary tightening would likely see it rise further.

Despite the risks, emerging East Asia’s local currency bond markets continue to expand. By 30 September, there were $8.2 trillion in such bonds outstanding, 3.1% higher than at the end of June and 11.3% more than a year earlier. 

The fastest-growing markets on a quarterly basis were Singapore, the PRC, and Indonesia.

An annual liquidity survey of the region’s local currency bond markets showed that liquidity conditions have improved in 2014 compared with 2013, although liquidity in government bonds far outpaces that of corporate bonds.
Bid-ask spreads, which tend to be narrower in liquid markets, were lowest in Korea, followed by Malaysia and Thailand.