Debt capital markets: Halting Asia’s bond boom

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Asia DCM specialists still have their foot on the accelerator, but it might soon be time to hit the brakes.

The thriving bond markets of east Asia are under threat, with a flood of capital from the developed world coupled with the looming US fiscal cliff and worries about China’s economy poised to derail their stellar recent progress.

The recent and future growth of bond markets in the region has largely been taken as a given as the economies of Asia mature and bond market liquidity deepens in step.

But worries are beginning to be voiced about possible barriers to their progress. Even the Asian Development Bank says the downside risks posed, particularly by the US fiscal cliff, are substantial. Interested parties should take note. The bond market has, almost stealthily, become one of the most important sources of funding for companies and governments across Asia. The combined amount of corporate and government bonds outstanding in emerging east Asian markets rose 11% in the third quarter this year on the same period in 2011. But most emerging east Asian yields have been declining since late July. Concerns over weak growth in the first half of the year and continued low inflation have prompted South Korea, the Philippines and Thailand, among others, to cut interest rates.

Government bond markets are already growing more slowly than corporate bonds markets as a result of the sharp reduction in issuance by central banks and monetary authorities as they have retreated from what the ADB terms the "aggressive sterilization" measures pursued in previous years.

Away from these fresh concerns about bond market growth, two immediate potential sources of volatility have been removed: there is now clarity on the succession of power in China and the election process in the US is over. Signs are encouraging, so far, that equity markets are at least likely to respond with a period of more stability, which could in turn lead to an uptick in market activity, particularly with respect to IPOs early next year. This could benefit those banks that have kept faith with the historical slant of Asia’s markets towards equity.

One analyst says that although loan growth might slow in 2013 after several years of strong growth, he believes asset quality will remain resilient for most countries given the benign macro backdrop of relatively resilient economic growth, low interest rates and what it terms "fairly robust" credit growth.

Banks and other market participants that have positioned themselves to capitalize on a bond market boom might be forced to rethink their strategies if the approaching outside factors do turn out to be strong enough to halt progression.