Emerging East Asian Local Currency Bond Markets: A Regional Update

Bond Market Developments in the First Half of 2009

HIGHLIGHTS

- The global economy has shown tentative signs of recovery in recent months as economic stimulus - both monetary and fiscal - has begun to take effect.

- Financial markets are recovering faster than expected, with credit spreads narrowing; corporate default risk decreasing; and stock markets staging a turnaround, with emerging Asia leading the way.

- Growth in emerging East Asia’s local currency bonds outstanding recovered strongly in the first half of 2009, led by strong primary corporate debt markets and government bond issuance in support of fiscal stimulus.

- The corporate sector emerged as a more significant driver of growth than government issuance due to large funding needs for energy and infrastructure investments, as well as bank issuance to support capital adequacy ratios.

- Emerging East Asia’s stock of treasury bills and central bank bills rose during the first half of the year, as steepening yield curves in most markets led to aggressive issuance of short-term bills by central banks, monetary authorities, and finance ministries.

- Government bond yield curves have steepened in most markets through August, reflecting much lower policy rates at the short end of the curve and market concerns over fiscal sustainability at the long end.

- G3 currency bond issuance by emerging East Asia’s governments and corporations through early September was more than double the amount for all of 2008, due to both improved global market conditions and investor appetite for yield.

- In the first half of 2009, returns on LCY bonds declined slightly from their lackluster performance in 2008, as investors focused on the region’s resurgent equity markets.

- State-owned enterprises remain the dominant players in many of the region’s LCY corporate bond markets, with banks, infrastructure, and energy companies as primary issuers.

- Across emerging East Asian markets, credit spreads have tightened for higher-rated securities in most corporate bond markets compared with September 2008 levels; for lower-rated corporate credits, investors still demand substantial risk premiums.

- The lack of a more diverse corporate debt market,including a weak high-yield segment, remains a major shortcoming of LCY bond markets in the region.