Emerging East Asian Bond Yields Fall as Global Economic Prospects Improve

Bond yields in emerging East Asian markets continued their downward trend between 1 March and mid-May as optimism in global economic prospects gained pace, the Asian Development Bank’s (ADB) Asia Bond Monitor said.

“Strong economic fundamentals are helping emerging East Asian markets to realize gains from the improved global outlook,” said Yasuyuki Sawada, ADB Chief Economist. “Policy efforts should continue to encourage investments in emerging East Asia while safeguarding the region’s financial stability.”

Among local currency (LCY) government bond markets in the region, Indonesia experienced the largest decline in yields as it benefited from positive investor sentiment and a credit rating upgrade. Bond market expansion slowed in the People’s Republic of China (PRC) — the largest LCY bond market in emerging East Asia — amid debt concerns and the PRC government’s associated deleveraging efforts.

Total outstanding LCY bonds reached $10.5 trillion by end-March, despite an overall slowdown in new issuance in the first quarter of this year at $852 billion, down from the $946 billion of the previous quarter. Government bonds accounted for $6.8 trillion or 64.9% of the region’s total bond stock, with corporate bonds accounting for the rest.

The report highlights several risks that the emerging East Asian bond markets will likely face in the coming months despite favorable macroeconomic conditions, including tightening global liquidity conditions and the vulnerability of financial markets to cyberattacks.

The report empirically analyzes whether LCY bond market development promotes financial stability in emerging markets. The analysis finds that expansion of LCY bond markets reduces the depreciation of exchange rates in emerging markets in the face of global financial shocks, pointing to a stabilizing role of LCY bond markets.

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