Local Currency Bond Research Articles

China-ASEAN Regional Bond Market Cooperation: Present Situation, Opportunity, and Strategy Choice

A report from the 20th National Congress of the Communist Party of China underscored the necessity of maintaining the trajectory of reforming the socialist market economy and enhancing global openness. Strengthening cooperation in the China-ASEAN regional bond market and advancing high-level bond market liberalization are essential in establishing financial prowess. This paper reviews and summarizes the China-ASEAN regional bond market development within the context of international cooperation initiatives like the Belt and Road Initiative and the Regional Comprehensive Economic Partnership Agreement (RCEP). It analyzes the current state of international bond markets and local currency bond markets in ASEAN nations, systematically examines the opportunities, challenges, and risks associated with the development of the China–ASEAN regional bond market, and offers strategic recommendations for bond market collaboration based on the financial cooperation realities among these countries. The report provides significant insights for enhancing the Belt and Road Initiative and China-ASEAN financial collaboration within the RCEP framework, fostering regional economic integration and strengthening bond market cooperation and development between China and ASEAN nations.

The effects of financial risk components on local-currency bond markets: theory and empirical evidence

The effects of financial risk components on local-currency bond markets: theory and empirical evidence

Developing the Market for Local Currency Bonds by Foreign Issuers: Lessons from Asia

Developing the Market for Local Currency Bonds by Foreign Issuers: Lessons from Asia

The Effects of Foreign Participation on Chinese Government Bond Yields

Abstract Research background Since 2015, when China opened up its onshore bond markets more substantially, foreign investors have significantly increased their investments in Chinese local currency bonds. Purpose This study aims to examine the effects of foreign participation on Chinese government bond yields. Research methodology This study adopts a robust least squares model and a cointegration model. Results (Greater) foreign participation can significantly decrease 10-year Chinese government bond yields. Novelty There are almost no studies of the benefits and costs of foreign participation in Chinese bond markets. The conclusion drawn from this study is the first of its kind in the academic literature on the Chinese market, and contributes to knowledge about foreign participation in local currency bond markets.

Local Currency Bond Markets in Africa: Resilience and Subordination

ABSTRACTThis article examines the development and implications of local currency bond markets (LCBMs) in African countries in the context of international financial subordination (IFS). Despite the promotion of LCBMs as a solution to debt vulnerability, there is a dearth of research that offers a systematic empirical examination of their actual benefits along with conceptual explanations as to when and why such benefits may or may not materialize. This is especially true for countries at the bottom of the global economic hierarchy. To explore how the subordination in global production and financial systems shapes LCBM development, the article offers an empirical analysis of selected African countries that combines interviews with policy makers, officials and experts with statistical data. The findings suggest that while LCBMs offer some benefits, such as mitigating risks associated with foreign currency debt, their potential is limited by the structural processes created by IFS, such as their dependence on the global financial cycle, the relatively higher costs of this debt and the sustained constraint on macroeconomic policy making. However, there are also domestic factors which shape how these structural constraints are mediated in the context of LCBM development — in particular, historically developed financial structures of developing countries, the political economy of the state and the structure of production. This study thus contributes to the debate about the developmental benefits of domestic debt market development and the emerging research agenda on IFS.

Challenges in promoting local currency corporate bonds in Asia: Evidence from international business relationships

In Asia, in contrast to government bond markets where reliance on foreign currency bonds has diminished after proactive policy initiatives, the corporate sector still has a large share of foreign currency bond outstanding. We analyse this phenomenon by examining the driving factors behind Asian corporate bonds’ currency choice (local currencies versus US dollar). Our results suggest that, although the successful market developments reduced barriers for Asian firms to issue in local currencies, such constructive effect was inevitably limited by firms’ FX exposures induced by Asian firms’ rapid involvement in international business during the same period. In addition, US dollar bond issuances in the region are more associated with FX funding needs from the expenditure side rather than natural hedging against FX revenue, implying that the problem of currency mismatch likely still exist among Asian firms. As such, Asian policymakers should devote more attention to firms with more cross-border payments when scrutinising the corporate sector’s financial vulnerability. They should also continue fostering the development of local currency bond markets and spur the use of local currencies in invoicing regional business transactions.

Do foreign investors affect the volatility of local currency bond prices? Empirical evidence from China

How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.

Fickle emerging market flows, stable euros, and the dollar risk factor

Policymakers fear the destabilizing impact of fickle global investors on emerging markets. Euro area investors are significant participants in emerging bond markets and exhibit volatile flows, but their fickleness does not result in indiscriminate periods of surge and flight. Employing granular data, we discern important investor differentiation by currency denomination and issuer-level risk factors. First, euro area investors exhibit a home currency bias leading to both strong cross-sectional preference and more stable flows to EUR-denominated bonds over time. Second, volatile flows to USD and local-currency-denominated bonds are robustly related to global risk factors including the broad dollar. Investors differentiate among USD-denominated bonds such that flows to currency mismatched (and less creditworthy) sovereigns and corporates are more sensitive to the broad dollar. In contrast, local currency bond investors appear primarily concerned with currency rather than issuer-specific credit risk.

The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity

The Development of Local Currency Bond Markets and Uncovered Interest Rate Parity

Local Currency Bond Market Development and Currency Stability amid Market Turmoil

Local Currency Bond Market Development and Currency Stability amid Market Turmoil

Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds

We study the dynamic properties of sovereign bonds in emerging markets and their associated risk premiums. We focus on the properties of credit spreads, exchange rates, and their interaction. Relying on the term structure of local currency bonds issued by Asia-Pacific sovereigns, we find that local variables are significant in the dynamics of currency and credit risk, and the components of bond risk premiums reflecting these risks. Local currency bonds dramatically improve the investment frontier.

DETERMINING FACTORS FOR 10-YEAR LOCAL CURRENCY SOVEREIGN BONDS YIELD WITH DYNAMIC REGRESSION MODEL

Sovereign bonds, particularly Local Currency Bonds (LCB) of 10-year tenure, had a strategic role in economy, thus understanding factors affecting its yield’s movement would help government to maintain economic stability.
 This paper empirically study Indonesia’s 10-year LCB and its relationship with several factors; US Treasury (UST) yield, credit default swap (CDS), foreign ownership, central bank's policy rate (policy rate), exchange rate, volatility index (VIX) and primary dealers' trading behavior. The relationship was modelled using Dynamic Regression Model (DRM), with ARIMA errors to absorb the dynamics. Evaluation on the model's performance was conducted by making prediction on the real LCB yield’s movement during 2021.
 The best model containing 10y-UST yield and its lag-1, 5y-CDS and its lag-1, exchange rate, policy rate and ARIMA errors of AR(1) and AR(2) could perform well in predicting the real yield. This study confirmed that 10y-UST and its lag-1 are the main drivers for the LCB yield’s movement, along with compelling influence of the exchange rate.

Experience in developing the corporate bond market in ASEAN+3 countries and lessons for Vietnam

Vietnam is viewed as having a banking-dependent financial system. The population's idle capital is mainly used to serve the investment needs of the economy indirectly through the banking system. Therefore, developing the stock market, particularly the corporate bond market, enables the economy to minimize its dependence on the banking system and generate capital for the economy. Issuing bonds is considered a method of raising money that has a number of advantages, including the ability to mobilize capital from all economic sectors. On the other hand, several comments in the research on promoting long-term capital financing suggest that the issuance of bonds also provides the market and investors with a financial tool, assisting in the diversification of investment portfolios and risk reduction. Developing the corporate bond market is not only in Vietnam but also becomes an urgent task than ever when the domestic, regional and world economies face numerous difficulties stemming from crises. According to the Asian Development Bank (ADB), one of the main reasons behind the 1997 Asian financial crisis was the excessive dependence of Asian economies on commercial banks for domestic financing. Asian countries have almost failed to diversify financial sources to finance businesses because these economies mainly rely on banks instead of other financial instruments, in particular. The bond market is still underdeveloped and quite small in size. Moreover, Asian countries need a substantial long-term source of capital (US$750 billion per year 2010–2020) to develop infrastructure connectivity within and between economies in the region. Therefore, the restructuring of the financial system, in which the diversification of capital funding sources, specifically promoting the bond market in general and the corporate bond market in particular, becomes an indispensable need not only of especially in Vietnam but also in Asian countries, especially since the 1997 Thai currency crisis and the 2008 global financial crisis, through the bond market in general and the corporate bond market in particular, sources local and regional capital can be channeled into infrastructure projects and other productive investments over the long term. Having a well-developed local currency bond (including corporate bonds) market can enhance the resilience of domestic financial markets to external shocks and facilitate better intermediation between savings and investment. invest in production in Asian countries, including Vietnam. Therefore, learning about the experience of developing the corporate bond market in a number of countries in the ASEAN+3 region, thereby drawing lessons from experience for Vietnam is critical for the country's development of the corporate bond market.

What drives local currency bond market development in Saudi Arabia: do macroeconomic and institutional factors matter?

The main objective of this study is to empirically determine which factors are related to the development of local-currency bond market (LCBM) in Saudi Arabia over the period 1990–2019. Using ARDL modeling, the results reveal long-run cointegrating relationships between LCBM capitalization and macroeconomic, financial, and institutional factors. Unlike institutional ones, macroeconomic and financial factors seem to matter more in developing LCBM in the short run. However, in the long run, larger economic size more government spending, low inflation levels, broader and deeper banking system, higher bureaucratic quality, and better investment profile, all play a crucial role in the determination of Saudi LCBM. Policy implications include measures toward sound macroeconomic fundamentals, broad and deep banking system, efficient stock market, and high-quality governance institutions.

Financing for the Post-pandemic Recovery: Developing Domestic Sovereign Debt Markets in Central America

The pandemic has urged countries around the globe to mobilize financing to support the recovery. This is even more relevant in Central America, where the policy response to cushion the pandemic’s economic and social impact has accentuated pre-existing debt vulnerabilities. This paper documents the potential for local currency bond markets to diversify and expand financing for the recovery, lowering bond yields, funding volatility, and exposure to global shocks. The paper further identifies priority actions, both national and regional, to support market development.

Good-bye original sin, hello risk on-off, financial fragility, and crises?

We analyze the sovereign bond issuance data of eight major emerging markets (EMs) - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey from 1970 to 2018. Our analysis suggests that (i) EM local currency bonds tend to be smaller in size, shorter in maturity, or lower in coupon rate than foreign currency bonds; (ii) EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC); (iii) inflation-targeting policy increases the likelihood of issuing local-currency debt before GFC but not after; and (iv) EMs that offer higher sovereign yields are more likely to issue local-currency bonds after GFC. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.

LOCAL CURRENCY BOND MARKETS, FOREIGN INVESTOR PARTICIPATION AND CAPITAL FLOW VOLATILITY IN EMERGING ASIA

This paper examines the role of local currency bond markets (LCBMs) and foreign investor participation in these markets in capital flow volatility in emerging Asian economies over the period 1999 to 2020. Using a panel analysis and impulse response functions generated from a panel structural vector autoregression, we show that greater development of LCBMs across 10 Asian emerging economies in terms of capitalization helps to mitigate against the capital flow volatility, while foreign investor participation has the opposite effect, particularly for less developed LCBMs. Our findings have policy implications from a financial stability perspective, whereby continued efforts to enhance LCBMs while reducing reliance on foreign investors should be encouraged. Strengthening the local investor base and mobilizing domestic resources through LCBMs ought to be a priority for raising long-term capital that will enable the financing of sustainable investment and development. Our findings also suggest that greater efforts are needed to enhance foreign exchange hedging arrangements for foreign investors in LCBMs, particularly in times of heightened financial stress.

Role of global, regional, and advanced market economic policy uncertainty on bond spreads in emerging markets

This paper investigates the predictive content of news-based advanced market, regional, and global economic policy uncertainty (EPU) measures for bond spreads and their volatility in emerging markets (EMs) by extending the higher (k-th) order nonparametric causality-in-quantiles test to a multivariate case. Results show that global and advanced market EPU measures have predictive power for EM bond spreads in the lower and upper quantiles while for volatility, the predictive power is stronger in the upper quantiles and further observes predictability in the mid quantiles. Predictability detected for all EMs is characterized by an inherent heterogeneity leading to an asymmetric pattern over the distribution of EM bond spreads and volatility. The implication for heterogeneity in our results is that when EPU is high in advanced markets, global investors’ appetite for the EM local currency bonds increases due to high yields. However, when EPU is low, global investors move out of EMs because of the perceived unsafe investment environments in EMs.

Guidance Note For Developing Government Local Currency Bond Markets

This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.

Emerging Market Economy Exchange Rates and Local Currency Bond Markets Amid the COVID-19 Pandemic

Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows.Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation.EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic.To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a "dealer of last resort" role; a number of them are already moving in this direction.