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COVID-19-induced uncertainty affects bond markets

The COVID-19 pandemic continues to drag on local currency bond markets in emerging East Asia, including Vietnam, as investment sentiment globally and in the region wane and containment measures limit economic activity.

COVID-19-induced uncertainty affects bond markets hinh anh 1

Vietnam’s local currency bond market posted a healthy 9.5 percent quarter-on-quarter growth in the first quarter of 2020 to reach 57.6 billion USD at the end of March. — (Photo baodauthau.vn)

 

According to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor, Vietnam’s local currency bond market posted a healthy 9.5 percent quarter-on-quarter growth in the first quarter of 2020 to reach 57.6 billion USD at the end of March.

This is mainly due to a strong growth rate of the Government bond segment with growth rate of 10.5 percent to 53.3 billion USD, accounting for 92.6 percent of the country’s total bond stock.

Corporate bonds, however, contracted 1.7 percent, marking 4.2 billion USD at the end of March given the absence of new issuance over the review period.

Vietnam is among entering East Asia countries and territories comprised of mainland China and Hong Kong, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore and Thailand.

ADB Chief Economist Yasuyuki Sawada said governments and central banks in the region have taken significant measures to mitigate the impact of COVID-19 through fiscal stimulus packages and eased monetary policies. But more needs to be done to strengthen the region’s economies and financial markets.

“While overall investment sentiment is still down, there are signs of recovery in some economies as quarantine measures are strategically relaxed,” Sawada said.

Government bond yields trended downwards in most regional markets between 28 February and 29 May this year, while equity markets in emerging East Asia suffered losses and local currencies depreciated against the US dollar.

Credit spreads have widened for nearly all markets in the region as investors took a risk-averse approach, with the share of foreign holdings in most of emerging East Asia’s local currency bond markets also declining.

Risks to the global outlook remain heavily tilted to the downside, mainly due to the uncertainty brought about by the COVID-19 pandemic, including the prospect of longer periods of minimal economic activity and further waves of outbreaks. Other risk factors include trade tensions between China and the US, as well as financial volatility due to capital outflows from emerging markets.

Local currency bonds outstanding in emerging East Asia totalled 16.3 trillion USD at the end of March, up 4.2 percent from December 2019 and 14 percent higher than in March 2019. Bond issuance in the region reached 1.7 trillion USD in the first quarter of 2020, up 19.7 percent from the fourth quarter of 2019.

Emerging East Asia’s local currency bonds outstanding as a share of gross domestic product rose to 87.8 percent at the end of March.

Government bonds outstanding rose to 9.9 trillion USD at the end of March, while corporate bonds reached 6.4 trillion USD. China remains the largest bond market in emerging East Asia, accounting for 76.6 percent of the total bond stock at the end of the first quarter of 2020.

The second issue of Asia Bond Monitor this year includes five discussion boxes focused on the COVID-19 pandemic. They explore its impact on capital markets; the possibility of issuing pandemic bonds as an option to fight COVID-19; the rising attention directed to social bonds in response to the pandemic; using fintech to promote inclusive growth and pandemic resilience; and the infrastructure and policies needed for firms to obtain financing during the COVID-19 pandemic.

The report also includes a theme chapter on the link between financial architecture and innovation. It highlights the importance of a sound and efficient financial system in fostering a viable innovation environment./.VNS

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