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Emerging East Asian Bond Yields Diverge Amid Varied Monetary Policy

News Release | 21 September 2018

MANILA, PHILIPPINES (21 September 2018) — Bond yields in emerging East Asian markets diverged between 1 June and 15 August, with yields rising in economies that took steps to support local currencies or tackle rising inflation—such as Indonesia, the Philippines, Thailand, and Viet Nam—and yields sliding in countries such as the Republic of Korea, Malaysia, and the People’s Republic of China (PRC), where the People’s Bank of China lowered the reserve requirement ratios for some banks, according to a new report by the Asian Development Bank (ADB).

The trend occurred amid global uncertainty, as the US continued to raise interest rates and the eurozone is expected to begin monetary tightening, which have contributed to the depreciation of most currencies in emerging East Asia[1], according to the latest quarterly update of the Asia Bond Monitor.

“The difference in bond yields reflects disparate monetary policy stances across emerging East Asia amid global economic uncertainty,” said ADB Chief Economist Mr. Yasuyuki Sawada. “But emerging East Asia still has strong fundamentals, and the current risks posed by financial turbulence in emerging markets such as Argentina and Turkey seem limited for the region. Still, given the febrile state of global financial markets, Asian authorities would do well to monitor developments closely and be prepared to take preventive measures if warranted.”

Overall, the total size of local currency bond markets in emerging East Asia grew to $12.6 trillion at the end of June, up 3.2% from the first quarter of 2018. Government bonds made up 67% of the region’s local currency bond market at the end of June, amounting to $8.4 trillion. Corporate bonds, meanwhile, grew 1.8% from the first quarter, reaching $4.2 trillion.

The PRC remains the region’s largest bond market, making up 72% of the total bonds outstanding in the second quarter of 2018, up 3.8% from the first quarter. The expansion was largely driven by a surge in the issuance of local government bonds as local governments rushed to meet the August deadline of the debt-for-bond swap program.

Net foreign fund flows in the region’s local currency bond markets were mixed in the review period. For example, foreign bond investment in Indonesia and Malaysia dropped while the Republic of Korea and Thailand enjoyed high foreign investor interest.

Risks to the region’s bond markets include escalating global trade tensions, rising private debt levels in some economies, and volatile global oil prices. The latest issue of the Asia Bond Monitor discusses in-depth how global trade tensions between the PRC and the US will affect financial markets. Because most countries in the region have very close economic ties with the world’s two largest economies, the report says ongoing trade tensions may adversely affect business and consumer confidence. However, the response of the financial markets, which have been taking a wait-and-see attitude, has been calm and limited so far.

The report also analyzes the rising popularity of cryptocurrencies and their effect on financial markets, as well as regulatory options. The report points out that there are risks that come with the rise of cryptocurrencies, such as price volatility, but concludes that the size of the cryptocurrency market remains small and doesn’t yet pose a threat to financial market stability.

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 67 members—48 from the region. In 2017, ADB operations totaled $32.2 billion, including $11.9 billion in cofinancing.

[1] Emerging East Asia refers to the People’s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.