Bond yields seen rising due to market volatility

MANILA, Philippines—Asian companies should look for other sources of funding as bond yields, both for the government and the private companies, are expected to rise due to volatility in the region’s financial markets.

In its latest Asia Bond Monitor, Manila-based Asian Development Bank (ADB) said even strong countries like the Philippines had seen yields on government treasury—the benchmark for the cost of debt—which had risen amid recent concerns over the tightening of monetary policies in the United States.

“Emerging East Asia has witnessed an outflow of funds since the May 22 remarks of United States Federal Reserve Chair Ben Bernanke that US monetary policy could soon be tightened,” the multilateral lender’s report said.

“A slower growth outlook for the region has also contributed to capital flowing out, with the withdrawal of funds leading to rising bond yields and depreciating currencies,” it added.

The increased risk aversion against emerging market assets was evident in the second quarter of the year, the ADB said.

The ADB said the quarter-on-quarter growth in local currency government bonds throughout the region decelerated to just 1.1 percent in the second quarter from 1.9 percent in the previous quarter. There was an even larger drop in the corporate sector’s growth rate to 2.9 percent from 4.7 percent in the same period.

The ADB said that while the region was much stronger than it was during the Asian financial crisis in 1997, the capital outflows and higher funding costs highlight the need to promote more stable sources of funding.

“During periods of interest rate volatility, bond markets can become a source of risk,” the ADB said.

Countries like the Philippines, which reduced its exposure to foreign debt in the last three years, are less susceptible to volatility in the bond market, the ADB said. However, local bond yields were still not spared from the effects of the risk aversion by foreign investors.

The rise in yields was most evident for tenors of 1 year and below, with yields rising between 127 basis points (bps) and 175 bps from March to May. Yields for 10 and 25 year bonds increased 29 bps and 51 bps, respectively.

The rise in yields was due to a sell-off at the end of May driven by speculation that the United States (US) Federal Reserve would soon start tapering its quantitative easing program, the ADB said.