Higher US interest rates or a sharp rise in the US dollar could pose challenges to East Asia’s local-currency bond markets, the Asian Development Bank (ADB) said yesterday.
While the markets have shown themselves to be resilient, the Manila-based lender said in its quarterly Asia Bond Monitor that their composition left them vulnerable to external influences.
“Higher US rates and a stronger dollar could prove 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 Azis, the head of the bank’s Office of Regional Economic Integration.
Markets currently anticipate no US interest rate rise before the middle of next year, but the bank said a swifter-than-expected improvement in the US economy could bring that forward.
Companies in Asia may find it harder to raise local-currency funds as stricter capital rules force banks to reduce their holdings of riskier bonds, the report said.
Liquidity in the region might dry up, making it harder for money managers and corporates to enter and exit the market easily and with minimal cost, the bank said.
“There are concerns liquidity conditions are tightening because the higher capital requirements under Basel III regulations have pushed banks to reduce their holdings of bonds,” ADB said. “The capital that banks are required to hold against risky assets, such as low-rated local-currency corporate bonds, has risen significantly. This has had the effect of making the region’s local-currency corporate bond market much less liquid.”
On Monday, Standard & Poor’s said sales of Basel III hybrid securities by major banks in the Asia-Pacific region could reach US$350 billion by 2019.
“Although Basel III principles are the same in all member countries, each jurisdiction has its own policy, derived from its regulator’s stance toward bail-ins and resolution regimes,” it said.
China’s weaker property market also poses a risk to Asia’s local-currency bond market, the ADB said.
In China, “small and less creditworthy companies might find access to funds limited,” the bank said in the report.
Additional reporting by Bloomberg
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