Peso bond market up 8.8% in Q2

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The Philippine local currency (LCY) bond market grew 8.8 percent year-on-year in the second quarter of 2014, with increases in both government and corporate bond issues, the Manila-based Asian Development Bank (ADB) said.

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In the latest Asia Bond Monitor report, ADB said the country’s total LCY bonds rose to P4.492 trillion ($103 billion) from P4.128 ($96 billion) a year earlier.

On a quarterly basis, LCY bonds increased 1.4 percent from the end-March level of P4.429 trillion ($99 billion).

Outstanding fixed-income instruments issued by the Philippine government and government-controlled companies, or government bonds, rose 6.5 percent year-on-year to P3.819 trillion at end-June. They were up 1.9 percent from the first-quarter level of P3.749 trillion.

The government bond market consists of outstanding fixed-income instruments issued by the Philippine government and government-controlled companies.

Treasury bills totaled P288 billion during the quarter, down 6.4 percent from P308 billion a year earlier.

The lender traced the drop in Treasury bills to the Bureau of the Treasury’s (BTr) decision to reject some of its Treasury bill auctions as investors sought higher yields given rising inflationary concerns.

Treasury bonds increased 7.9 percent year-on-year to P3.415 trillion, while fixed-income instruments issued by government-controlled companies remained unchanged at P116 billion.

Meanwhile, outstanding LCY corporate bonds swelled 24.4 percent to reach P673 billion in the quarter under review, from P541 billion a year earlier, the ADB report said.

However, on a quarterly basis, corporate bonds at end-June were down 1.1 percent from P680 billion in the previous quarter.

“In the Philippines, corporate bonds, outstanding, fell due to less issuances in [the second quarter of 2014]as most corporates shied away from issuing bonds amid expectations of higher interest rates,” the ADB report said.

According to the report, only 54 companies were actively tapping the bond market in the Philippines, with the top 30 issuers accounting for 88.5 percent of total LCY corporate bonds outstanding as of end-June.

From this group, only seven companies were privately-held corporations and the rest were publicly listed on the Philippine Stock Exchange, it said.

Ayala Land was the largest corporate issuer in the country as of the second quarter, with P57.9 billion of outstanding debt; SM Investments was the next largest borrower, with P41.9 billion, and Ayala Corp. at third, with P40.0 billion.

The Asia Bond Monitor report provides market summaries of the emerging East Asia region, which includes China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

Emerging East Asia
Overall, emerging East Asia’s local currency bonds have performed well so far in 2014, the ADB report said.

As of the second quarter, there were $7.9 trillion in outstanding bonds in emerging East Asia, 2.5 percent more than at the end of March and 9.3 percent more than at the end of June 2013.

Local currency bond issues totaled $1.1 trillion in the second quarter, up from $852 billion in the first quarter, while sales of bonds denominated in US dollars, euros, or yen in January through July stood at $121.4 billion, suggesting the region was poised to set another record for annual issuance, the report said.

Vietnam was the fastest growing local currency bond market, both on a quarterly and annual bases, but China remains the largest market in Asia after Japan, with $4.9 trillion in outstanding bonds.

Despite this, the lender warned that an earlier-than-anticipated United States rate hike, and higher risk aversion and inflation due to Middle East tensions, could undermine the LCY performance of these economies.

“Asia looks well placed to face any volatility but the risks are definitely rising,” said Iwan J. Azis, head of ADB’s Office of Regional Economic Integration.

“Higher US interest rates and a stronger dollar could also make it tougher for the rising number of US dollar borrowers to service their debt,” he added.

The ADB further mentioned that a slowing property market in China is also a concern because most collateralized borrowing is secured against property.

“A drop in property-related revenue could make it more difficult for local governments to service their bonds. Property companies have also become increasingly prevalent bond issuers themselves,” it said.

The report noted an increase in sales of Chinese yuan-denominated bonds outside of China, given that the country has gradually liberalized the use of its currency for trade and investment. Since the first sale of the so-called dim sum bonds in 2007, such issues have expanded to 10 billion yuan in 2010 and 369 billion yuan in 2013.

Although a greater variety of borrowers tap the dim sum bond market, China and Hong Kong borrowers still made up 73 percent of all issuances last year, it said.

“To develop the market further, greater participation from non-PRC borrowers is needed. Similarly, there is a greater need for higher-rated issuance not only to meet investor demand but also to provide a pricing guide, the report said. Unrated issuance now accounts for the vast majority of outstanding dim sum bonds,” the ADB report concluded.

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