Bond yields in most emerging East Asian markets trended upward between 1 March and 31 May on the back of an expanding global economy and ongoing US monetary policy normalization, according to a new report by the Asian Development Bank (ADB).
The latest issue of the Asia Bond Monitor reports that government bond yields in most emerging East Asian markets rose during the review period. The main exception was the People’s Republic of China (PRC), where 2-year and 10-year yields declined after the People’s Bank of China reduced the reserve requirement ratio for banks.
“Emerging East Asia’s bond yields are trending up and the economic outlook remains positive,” said ADB Chief Economist Mr. Yasuyuki Sawada. “Countries in the region are well-placed to withstand external headwinds, including the general appreciation of the US dollar associated with the strong growth momentum of the US economy and the Federal Reserve’s interest rate hikes.”
Local currency bond markets in emerging East Asia continued to grow in the first quarter of 2018, albeit moderately at 1.1% quarter-on-quarter (q-o-q) growth, to reach $12.8 trillion. Local currency government bond market comprised 66.9% of the region’s aggregate bonds outstanding, reaching $8.5 trillion. Corporate bonds remained stable, growing 0.5% q-o-q to $4.2 trillion.
Bond market expansion moderated in the PRC, which remains the region’s largest bond market with a 71.5% share of total bonds outstanding. Growth was just 0.7% q-o-q in the first quarter of 2018 compared to the previous quarter’s 4.0% q-o-q. This is mainly due to the PRC government’s ongoing efforts to reduce credit risk.
Net foreign bond investment in emerging East Asia, meanwhile, slowed down in the first 4 months of 2018, as investors gradually reduced their exposure to the region’s local currency bond market due to higher US interest rates.
Some of the risks to emerging East Asia’s bond market identified by the report include faster than expected US monetary policy normalization, tighter global liquidity conditions, trade tensions, and currency weakness. High levels of corporate and household debt in some Asian economies can exacerbate the risk from higher US interest rates.
The latest Asia Bond Monitor includes a special theme chapter on the role of greenness measures in the development of markets for green bonds—or fixed income securities that exclusively fund projects with environmental- or climate-related benefits. Having a well-defined greenness measure can foster the further development of the green bond market, which, in turn, can help fund investment projects that benefit climate resilience and environmental sustainability.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region. In 2017, ADB operations totaled $32.2 billion, including $11.9 billion in cofinancing.