East Asia needs deeper high-yield bond market-ADB

HONG KONG, Sept 15 (Reuters) - Emerging East Asia's local currency bonds outstanding surged in the first half of 2009 but a weak high-yield segment remains a hurdle to deepening the region's bond market, Asian Development Bank said in a report.

The sales volume of new debt jumped as governments in the region scrambled to raise cash to finance their fiscal stimulus programmes and issuers from the banking, infrastructure and energy sectors took advantage of improved investor appetite to borrow funds as banks tightened lending.

The development bank defines emerging east Asia as including China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam.

It said the amount outstanding in the region's local currency bond markets grew by 12.8 percent to $3.94 trillion by the end of the first half of the year, with China, South Korea, Hong Kong, Philippines and Indonesia recording the biggest improvements.

That compares with Japan's $9.04 trillion market.

And yet local currency bonds performed poorly compared with last year in all countries in the region except Indonesia and Philippines, as investors focused on the region's surging equity markets.

Foreign ownership fell in Indonesia, Malaysia, South Korea and Thailand as overseas investors worried about government finances, foreign exchange volatility and because of funding pressure in their home markets.

The ADB said an amelioration of this trend is expected in the third quarter on the back of renewed investor confidence, anticipated economic recovery, and the strengthening of some regional currencies.

Corporate bond markets were much smaller than stock markets in the region because of poor disclosure and accounting standards, slow development of rating agencies, weak infrastructure, strong competition from bank financing and greater investor preference for equities.

State-owned companies were the main drivers in the corporate bond space and government firms in the banking, infrastructure and energy sector accounted for most of the outstanding bond stock, the report said.

Improved risk appetite had tightened credit spreads of AAA-rated bonds over government securities, but investors demanded substantial compensation for BBB-rated bonds as a result of which their spreads over top-rated bonds widened, it said. (Reporting by Umesh Desai; Editing by Neil Fullick)