Local currency bond sales in emerging East Asia grew at a slower pace in the July-September period from the previous quarter as governments sold less debt, the Asian Development Bank said.
Corporate bond sales accelerated, however, as the private sector took advantage of lower borrowing costs and high demand, particularly from offshore investors, the ADB said in its recent Asian bond monitor report released on Monday.
Total local debt sales rose 3 percent in the third quarter from 5 percent in the second, the ADB said.
Government debt sales grew 1.9 percent, less than the 5.1 percent rise in the second quarter, largely due to the unwinding of fiscal stimulus measures. Corporate debt issues expanded 5.7 percent from 4.9 percent during the same period, it said.
Foreign holdings of these bonds remained brisk, as lower interest rates in the United States and other developed markets drove yield-hungry investors into Asian emerging market bonds, the report noted.
"The rapid growth of corporate bonds marks a major structural change in the evolution of regional local currency markets," it said. The slowdown in government bond sales reflected the "paring down of fiscal stimulus programs in 2010 and an apparent reduction in issuance by central banks and monetary authorities."
The ADB defines emerging East Asia to include China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam.
China, Indonesia and Singapore had the highest rise in corporate debt issues, while sales in the Philippines, Thailand and Vietnam dropped during the period, the report said.
The Philippines posted the biggest growth in government debt issues as the new administration faced a bigger deficit this year, it said, while a sharp reduction was noted in Vietnam, Indonesia, Thailand, Hong Kong and South Korea.
Gains in local bond sales were matched by a rise in the issuance of debt denominated in U.S. dollars, yen and euro, which totaled $77.8 billion from January to mid-November, exceeding a record $63.2 billion for all of 2009.
South Korea was the biggest borrower in the offshore markets, with banks accounting for the bulk of these issues, it said. Other large issuers were China, Hong Kong and the Philippines.
But the strong offshore demand for emerging East Asian debt had its downside, the report said, as it led to the appreciation of local currencies versus the dollar, hurting exports. This prompted governments to impose capital controls, it said.
The report also noted that government bond yield curves have steepened lately, as investors worried about rising inflationary pressures and interest rate rises. But overall, they were still flat compared with levels at the end of 2009, it said.
"The near-term outlook for government bond yields is mixed," the ADB said. "Bond yield curves might steepen further if inflationary expectations gain and East Asian central banks tighten further."
On the other hand, ample global liquidity and sustained inflows into local government bond markets would continue to exert a downward pressure on yield curves, it said.
On the economic front, growth in emerging East Asia was expected to moderate due to a weaker global outlook and the normalization of monetary policies and removal of extra stimulus measures.
"The external environment facing emerging East Asian economies has weakened as the U.S. economy continues to struggle and a shadow lingers over the euro zone," the ADB said.
"While global financial markets have largely stabilized, the debt crisis facing some peripheral economies in Europe is a reminder of the risk overhang," it said.