Higher Yields To Compound Regional Downturn
BMI View: The surge in bond yields across the region is coming at a time of economic weakness, which is a dangerous combination. From Indonesia to India to China, corporates are feeling the pinch of higher borrowing costs amid already weak macroeconomic trends. The threat of a vicious cycle taking hold, where rising corporate bond yields weaken economic growth, leading to further increases in corporate bond yields, is looking like a distinct possibility.
In December last year, with the region looking poised for an acceleration in economic activity, we cautioned that a number of unforeseen risks could impede economic growth. Among the risks, we highlighted the potential for a reversal in sovereign and corporate bond yields across the region following a record plunge in borrowing costs.
"…credit default swap markets across the region are trading near record lows as the suppression of global volatility and low interest rates have encouraged a flood of capital into Asian bond markets… any hiccup in global financial markets would leave Asian markets extremely at risk in terms of rising borrowing costs"
|4% Corporate Yields Not Likely To Return|
|Asia - Corporate Bond Index Yield, %|