COVID-19-Induced Uncertainty Continues to Drag on Emerging East Asian Bonds
MANILA, PHILIPPINES (25 June 2020) — The coronavirus disease (COVID-19) pandemic continues to drag on local currency bond markets in emerging East Asia as investment sentiment globally and in the region wane and containment measures limit economic activity, says the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.
“Governments and central banks in the region have taken significant measures to mitigate the impact of COVID-19 through fiscal stimulus packages and eased monetary policies. But more needs to be done to strengthen the region’s economies and financial markets,” said ADB Chief Economist Yasuyuki Sawada. “While overall investment sentiment is still down, there are signs of recovery in some economies as quarantine measures are strategically relaxed.”
Emerging East Asia is comprised of the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.
Government bond yields trended downwards in most regional markets between 28 February and 29 May this year, while equity markets in emerging East Asia suffered losses and local currencies depreciated against the United States (US) dollar.
Changes in Financial Conditions
|Emerging East Asia||2-Year Government Bond (bps)||10-Year Government Bond (bps)||5-Year Credit Default Swap Spread (bps)||Equity Index (%)||FX Rate (%)|
|China, People’s Rep. of||(41)||(4)||4||(1.0)||(2.0)|
|Hong Kong, China||(48)||(38)||–||(12.1)||0.5|
|Korea, Rep. of||(37)||4||(7)||2.1||(1.8)|
( ) = negative, – = not available, bps = basis points, FX = foreign exchange. Data reflect changes between 28 February and 29 May 2020.
Sources: Bloomberg LP and Institute of International Finance
Credit spreads have widened for nearly all markets in the region as investors took a risk-averse approach, with the share of foreign holdings in most of emerging East Asia’s local currency bond markets also declining.
Risks to the global outlook remain heavily tilted to the downside, mainly due to the uncertainty brought about by the COVID-19 pandemic, including the prospect of longer periods of minimal economic activity and further waves of outbreaks. Other risk factors include trade tensions between the PRC and the US, as well as financial volatility due to capital outflows from emerging markets.
Local currency bonds outstanding in emerging East Asia totaled $16.3 trillion at the end of March, up 4.2% from December 2019 and 14% higher than in March 2019. Bond issuance in the region reached $1.7 trillion in the first quarter of 2020, up 19.7% from the fourth quarter of 2019. Emerging East Asia’s local currency bonds outstanding as a share of gross domestic product rose to 87.8% at the end of March.
Government bonds outstanding rose to $9.9 trillion at the end of March, while corporate bonds reached $6.4 trillion. The PRC remains the largest bond market in emerging East Asia, accounting for 76.6% of the total bond stock at the end of the first quarter of 2020.
The second issue of Asia Bond Monitor this year includes five discussion boxes focused on the COVID-19 pandemic. They explore its impact on capital markets; the possibility of issuing pandemic bonds as an option to fight COVID-19; the rising attention directed to social bonds in response to the pandemic; using fintech to promote inclusive growth and pandemic resilience; and the infrastructure and policies needed for firms to obtain financing during the COVID-19 pandemic.
The report also includes a theme chapter on the link between financial architecture and innovation. It highlights the importance of a sound and efficient financial system in fostering a viable innovation environment.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.