Emerging East Asian Bond Yield Curves Steepen as Region's Outlook Remains Positive | Asian Development Bank

Emerging East Asian Bond Yield Curves Steepen as Region's Outlook Remains Positive

News Release | 19 March 2018

MANILA, PHILIPPINES (19 March 2018) — Bond yield curves in most emerging East Asian markets rose steeply between 29 December 2017 and 15 February 2018, reflecting the positive economic outlook—both in the region and globally—and increased prospects of higher inflation, says a new report by the Asian Development Bank (ADB).

In the latest issue of the Asia Bond Monitor, ADB noted that 10-year government bond yields for nearly all emerging East Asian markets were up during the review period—with the exception of Viet Nam. Positive economic growth forecasts for 2018 for all the major advanced economies—the eurozone, Japan, and the United States—have boosted the rise in bond yields in emerging East Asian markets.

“Emerging East Asian markets are on a firm footing, with most countries enjoying robust growth amidst relatively stable financial market conditions,” said Yasuyuki Sawada, ADB Chief Economist. “The region is well placed to withstand external uncertainties, such as sharper than expected interest rate increases by the Federal Reserve as it gradually normalizes US monetary policy, but policymakers will have to be vigilant against external shocks through prudent macrofinancial policies.”

Local currency (LCY) bond markets in emerging East Asia continued to expand in the fourth quarter of 2017, reaching $12.3 trillion at the end of December, although quarter-on-quarter growth moderated to 3.1% from 4% in the last quarter as bond issuance declined. The People’s Republic of China (PRC)—the largest LCY bond market in emerging East Asia—remained the dominant issuer of LCY bonds, although quarter-on-quarter growth fell 1.3 percentage points to 4% in the fourth quarter of 2017 on the back of the PRC government’s ongoing deleveraging in a bid to reduce local market risks.

Government bonds comprised the biggest segment of the region’s total LCY bond stock, accounting for $8.2 trillion at the end of December or 66.6% of the total, while corporate bonds accounted for the remaining 33.4% or $4.1 trillion. Foreign investment in emerging East Asia’s bond market remains strong, with investors encouraged by the region’s improving economic fundamentals.

The report includes special discussions on the short-term and long-term effects of global monetary policy normalization and the resulting tighter liquidity in financial markets in the region, highlighting the implications of rising interest rates on the region’s private debt that accumulated during the low global interest rate environment.

Despite the overall positive economic outlook for the region, the report noted several risks including faster-than-expected interest rate hikes in the US, monetary policy normalization in major advanced economies, and the growing threat of inward-orientation across the global economy, which will likely dent the momentum of global trade expansion.

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.