11 Jan 2017
Impacts of US Monetary Normalisation on Corporate Bond Market in Emerging Asia
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 (Charts 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.
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.
II. Econometric model
We use a panel data model similar to that of Lo Duca et al (2014) with the following specification:
𝑌𝑖𝑖 = 𝛼 + 𝛽1𝑈𝑈𝑈𝑈𝑈𝑖𝑖 + 𝛽2𝑋𝑖𝑖 + 𝛽3𝐺𝑡 + 𝜀𝑖𝑖
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 et al (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.
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