Impacts of US Monetary Normalisation on Corporate Bond Market in Emerging Asia

This paper studies the potential impacts of US monetary normalisation on the emerging Asian corporate bond market, which has experienced explosive growth in recent years and become a crucial source of financing for the regional corporate sector. After controlling for global and economy-specific variables, we find that increase in US Treasury yields has the effects of reducing issuance, though only moderately, and shortening tenor in the corporate bond markets in emerging Asia. While no direct impact of US Treasury on corporate bond pricing is found, there is likely to be an indirect impact through domestic sovereign bond yields, in light of the significant pass-through from domestic sovereign to corporate bond yields, as well as evidence found on the pass-through from US Treasury yields to sovereign yields in the region in previous studies. JEL Classifications: G12, G15, G30


Introduction
Since the global financial crisis, unconventional monetary policy (UMP) actions of the US Federal Reserve have pushed interest rates down to unprecedentedly low levels globally.In Asia, corporate bond markets have experienced phenomenal growth as investors searched for yields (Figures 1 and 2).With the US economy showing sustained signs of strength, monetary policy normalization has begun: the Fed phased out its large scale asset purchase program (LSAP) in late 2014 and raised its policy interest rate for the first time in seven years in December 2015.With more tightening moves expected in the pipeline, concerns are mounting for the increasingly indebted corporate sector in Asia.Since financial markets are highly interconnected nowadays, the potential threat to the global financial stability has increasingly raised eyebrows in international policy forums. 1

Bond Issuance
Bond Pricing and Tenor

Figure 1: Market of non-financial corporate bonds in emerging Asia
Note: Bond issuance refers to the total issuance by non-financial corporates in eight emerging Asian economies, namely, China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.Bond pricing and tenor are the weighted average of these economies.
Source: Authors' estimates based on data from Dealogic.

Figure 2:
Outstanding amount of corporate bonds in emerging Asia  (1) The outstanding amounts are estimated based on data about the issuance of debt securities by assuming that all debt securities will be matured on their original maturity date.
(2) This chart covers eight economies in emerging Asia, namely China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.
Source: Authors' estimates based on data from Dealogic.
Against this backdrop, we investigate the potential impacts of US monetary normalization on the corporate bond markets of eight emerging Asian economies, namely, China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.

Econometric Model
We use a panel data model similar to that of Lo Duca, Nicoletti, and Martinez (2016) with the following specification: where the dependent variable Y is one of the three aspects about the corporate bond market, namely, bond issuance volumes, bond tenors and bond pricing.The 10-year US Treasury yield (USTSY) is used to capture US UMP actions for the reason that, according to many previous studies, these actions have direct impact on US Treasury yields.For example, Gagnon, Raskin, Remache, and Sack (2011) found that long-term US Treasury yields declined by up to 150 basis points around major LSAP announcements between December 2008 and March 2010.Krishnamurthy and Vissing-Jorgensen (2011) and Hamilton and Wu (2012) also found similar results.Therefore, it is reasonable to believe that the opposite would occur when UMP is unwound.Note that in this model setup, endogeneity or reverse causality should not be a concern since the priority of Federal Reserve policymakers in deciding UMP actions is primarily domestic economic and financial conditions rather than those of international economies.Therefore, from the perspective of emerging Asia, US UMP can be regarded as exogenous and pre-determined.
Other explanatory variables are included to control for the influences of global factors G (e.g., US VIX, slope of the US Treasury yield curve) and economy-specific factors X (e.g., local inter-bank interest rates, volatilities of local stock markets, and CDS spreads of individual economies).Because of the presence of unit roots, the first difference of a variable is used for estimation.

Data
The data of corporate bond issuance, tenor and pricing are obtained from Dealogic, whereas those of the remaining variables from Bloomberg, EPFR, CEIC, JP Morgan and Thomas Reuters.Our study period is Q1 2004 to Q4 2015, constrained by data availability.It is noteworthy that this period spans over more than one US monetary cycle, thus providing enough variability for the analysis.Tables 1 and 2 respectively provide descriptive statistics of the dependent and explanatory variables.

Empirical Results
It is found that an increase in the long-term US Treasury yield has a negative and statistically significant relationship with the issuance amount and tenor at issuance of bonds issued by non-financial corporations in the eight Asian economies (Table 3).More specifically, a one percentage point increase in the 10-year Treasury yield is associated with a US$117 million decline in corporate bond issuance in the Asian economies.Such an impact appears to be relatively moderate when viewed in relation to the present size of the market.To put matters in context, for the past three years, all the economies covered in this study registered an average annual corporate bond issuance well exceeding US$4 billion each year.Similarly, ~ 42 ~ the impact on bond tenor appears to be moderate, with the same amount of yield increase found to be associated with an approximately 0.7 year reduction in their tenor at issuance.However, the impact of long-term US Treasury yield on bond pricing at issuance is found to be statistically insignificant, suggesting that any impact might be indirectly through the channel of sovereign bond yields.Indeed, it is noted that sovereign bond yields are found to be an important factor affecting corporate bond pricing, with an estimated coefficient of 0.36 and it is statistically significant (Table 3).As the findings of previous research works (e.g., Fong, Hui, & Wong, 2015) suggest that the impacts of US Treasury yield changes on Asia Pacific sovereign bond yields are highly significant, its indirect impact on the corporate bond yields in the region can potentially be considerable.Note: For the study period from Q1 2004 to Q4 2015.

Concluding Remarks
In summary, our findings suggest that we are likely to see a reduction in bond issuance and a shortening of tenors at issue in the emerging Asian markets during the process of US monetary policy normalization.However, these impacts appear only moderate.We find no direct impact of US Treasury yields on domestic corporate bond yields.Nonetheless, the fact that the strong pass-through from sovereign bond yields to corporates bond yields in Asia, combined with evidence from other studies of significant spillover from US Treasury yields to sovereign bond yields in the region, means that the impact that works itself through the pricing of sovereign bond yields to corporate bond yields should not be ignored.

2 Table 1 :
Descriptive statistics of the dependent variables

Table 2 :
Descriptive statistics of the explanatory variables

Table 3 :
Empirical results