SEOUL (AFP) – Higher US interest rates or a sharp rise in the dollar could pose challenges to East Asia’s local-currency bond markets, the Asian Development Bank warned Tuesday.
While the markets have shown themselves to be resilient, the Manila-based lender said in its quarterly Asia Bond Monitor that their composition left them vulnerable to external influences.
“Higher US rates and a stronger dollar could prove a challenge given increased foreign holdings of Asia’s bonds, which could easily reverse, and record US dollar bond issuance by the region’s companies,” said Iwan Azis, the head of ADB’s Office of Regional Economic Integration.
US dollar debt becomes more expensive to service in local currency terms when the dollar appreciates.
Markets currently anticipate no US interest rate rise before the middle of next year, but the ADB said a swifter-than-expected improvement in the US economy could bring that forward.
The quarterly report also noted that companies in East Asia may have trouble raising local-currency capital because of stricter rules requiring banks to reduce holdings of riskier bonds.
“There are concerns that liquidity conditions are tightening because the higher capital requirements under Basel III regulations have pushed banks to reduce their holdings of bonds,” the ADB said.