Asian bonds pressured by interest rate, currency concerns

MANILA: Emerging East Asia’s bond markets came under pressure in the past quarter amidst concerns over softer growth, depreciating currencies, and US interest rates, the Asian Development Bank’s (ADBs) latest Asia Bond Monitor said.
“Asian bond markets were buffeted by strong headwinds, including anticipation of the US Federal Reserve rate hike, which has led to an outflows of funds in some countries,” said ADB Chief Economist Shang-Jin Wei. “The uncertainty in global bond markets points to the need for continued efforts to strengthen local currency bonds, which together with prudential regulations, can improve a country's resilience to foreign monetary and financial shocks.”
The report notes that an improved US economic outlook could see the US Federal Reserve raise interest rates as early as September, although the monetary authority may take a more cautious approach given recent weakness in developing economies and declining oil prices. Meanwhile in Asia, currency depreciations pose threats to corporates with large amounts of foreign currency denominated debt, while further falls in commodity prices could hurt highly leveraged companies in the sector.
As a result, yields—which move inversely to prices—of local currency bonds spiked in a number of markets including Indonesia and Malaysia, which have a large number of foreign investors. At the same time, some markets, including the Peoples Republic of China (PRC), the Republic of Korea, and Thailand saw yields dip, as authorities took steps to soften monetary policy in the face of weak growth outlooks.
In the currency markets, adjustments by the People’s Bank of China to the mechanism that sets the middle point for daily open exchange rates led to a 3.1% drop in the value of the renminbi against the US dollar between 1 June and 14 August, while the Malaysian ringgit fell 10.7%, the Republic of Korea won 6.3%, and the Thai baht 4.5%.