ADB SEES RISE IN BOND YIELDS

       A premature increase in bench-mark interest rates by Asia's central banks and widening budget deficits may push bond yields higher in the region, the Asian Development Bank said.
       "Discussions on exit strategies from easy monetary policy are creeping into the headlines and keeping bond investors on edge," Sabyasachi Mitra, an economist with the Office of Regional Economic Intergration, said in an interview before the Manila-based bank released the report on debt markets yesterday.
       Central banks in the region, from Indonesia to South Korea, have stopped cutting rates as their economies recover from the global recession.
       The Bank of Korea, which kept its benchmark interest rate unchanged at a record low 2 per cent for a seventh month in September, signalled last week it might increase borrowing costs to damp inflation risks.
       "A continuing trend toward a steepening of government bond yield curves" is also a risk, the ADB report said. "Government bond yield curves have steepened in most markets through August, reflecting much lower policy rates at the short end of the curve and market concerns over fiscal sustainability at th longer end."
       In the Philippines, the difference between two-and 10-year rates tripled to more than 3 percentage points this year, from less than 1 percentage point at the end of last year.
       A similar trend was seen in Indonesia and Thailand, the ADB said.
       APPROPRIATE MATURITIES
       The lender said in Korea, Hong Kong and the Philippines, debt maturing longer than 10 years accounts for just 5 per cent of the total, reflecting the "reluctance of investors to take longer-dated risk as well as the reluctance of issuers to pay the higher coupons".
       By contrast, 40 per cent of debt will fall due in more than 10 years in Indonesia, which "has remained mindful of the rollover risks created by an inappropriate maturity structure," the ADB said.
       Borrowing costs at record lows in places like the Philippines have encouraged companies to sell bonds, fuelling an expansion in local-currency debt markets.
       The corporate bond market expanded by 90.9 per cent in China and 62.4 per cent in the Philippines in the first half compared to a year earlier, according to the report.
       Local-currency bonds outstanding in emerging Asia increased 12.8 per cent in the first half to the equivalent of US$3.94 trillion (Bt135 trillion), the ADB said.
       "In the first half, corporate bonds have been a major driver of growth," Mitra said.
       "Easy monetary policy, low inflation and domestic liquidity in many markets have combined to provide corporates with easier access to local-currency bond markets," he said.