THE Philippines is one of just two economies in Emerging Asia that posted growth in bond yields between March 1 and May 15 against a backdrop of a weak world economy, the Asian Development Bank (ADB) said on Friday.
China was the only other country where bond yields “generally picked up,” the Manila-based multilateral lender said in its latest Asia Bond Monitor report.
During the period, local currency (LCY) government bond yields in the Philippines rose for the 3-month, 6-month, 1-, 2-, 10-, and 25-year tenors, and fell for the 3-, 4-, 5-, 7-, and 20-year tenors.
China’s 10-year bond yields rose by 2 basis points (bps), while Indonesia’s 10-year bond yield fell by 56 bps during the period in review. The 10-year yields of Singapore and Thailand fell by almost 30 bps each, and Vietnam’s 10-year yield saw a drop of 15 bps.
The report said the overall trend of declining yields in the region reflects a number of factors, including the United States Federal Reserve’s decision to keep interest rates steady during Federal Open Market Committee meetings in March and April; the International Monetary Fund’s downward revision of its 2016 global growth forecast to 3.2 percent from 3.4 percent; and the continued sluggishness in the world and regional economies.
Meanwhile, the Philippine LCY bond market grew by 0.5 percent to P4.7 trillion in the first quarter of 2016 from P4.68 trillion a year earlier.
According to the ADB report, government securities accounted for the bulk of outstanding bonds at P3.89 trillion, while corporate issuances reached P81 billion during the quarter.
However, in terms of year-on-year growth, the corporate bond market outpaced the expansion in the government bond market during the period as corporate bonds grew 6.3 percent in the January to March period while government bonds contracted by 0.6 percent during the same period.
Deflation emerging as new risk
The report said risks remain from further stagnation in the global economy and worries about financial instability, along with the potential for deflation in emerging East Asia.
A broad-based global economic slowdown could amplify global financial instability, which would further dent global growth, it said.
“The failure to gain sustainable growth traction since the global financial crisis has spread from advanced economies to emerging economies and now afflicts the entire world economy,” it added.
It said deflation is emerging as a new risk to financial stability in emerging East Asian markets.
“While falling prices were confined to advanced economies until recently, the PRC, the Republic of Korea, Malaysia, Thailand, and other emerging economies experienced deflation in 2015,” it said.
Deflation is so far largely limited to producer prices, with consumer price inflation remaining largely in positive territory.
Nevertheless, it said falling prices expand the real value of debt and thus increase the repayment burden of borrowers, which can put lenders at risk.
Furthermore, borrowing firms and households might be forced to cut back on investment and consumption, hurting aggregate demand and economic growth, the report said.