East Asia Bond Market: Expands But Concerns Persist
The Asian Development Bank approved US$1.5 billion in financing to support Indonesia’ efforts to alleviate the impact of the COVID-19 pandemic - Photo by ADB Office

JAKARTA (TheInsiderStories) – Local currency government bond yields in emerging East Asia trended downward between 28 December 2018 and Feb. 15, 2019, according to the latest Asia Bond Monitor. Otherwise, bond yields edged lower partly driven by expectations that the United States Federal Reserve will slow its pace of monetary tightening in 2019.

Even though, the report said, investor sentiment has improved, there are persistent concerns about financial stability in the region, including ongoing trade conflicts, according to the Asian Development Bank’ (ADB) latest issue of the quarterly Asia Bond Monitor.

Reportedly, at the end of 2018, there were US$13.1 trillion in local currency bonds outstanding in emerging East Asia, 2.4 per cent more than at the end of September 2018 and 11.9 per cent more than at the end of 2017.

Yields have fallen while foreign holdings have increased in most markets. Overseas investment in China‘ local currency bonds bucked the regional trend, however. The share of foreign holdings in the country market fell to 5.0 per cent at the end of December 2018 from 5.1 per cent at the end of September, reversing a rising trend seen since 2016, as the pace of United States (US) interest rate hikes looked set to slow and amid a depreciation in the Chinese yuan.

ADB Chief Economist Yasuyuki Sawada, said that the risks to financial stability in East Asia have receded somewhat recently. However, some uncertainties persist, notably from the unresolved trade conflict between the US and China, a potentially disorderly exit of the United Kingdom from the European Union, and slowdown of global growth momentum. The rapid buildup in private debt during the past decade could also damage economies and financial stability in the region, he added.

The wave of financial volatility that unsettled emerging markets last year has subsided in recent months. Vulnerable markets such as Argentina and Turkey are showing signs of stability.

A major factor behind the stabilization of emerging markets in Asia and elsewhere, evident in the stabilization of their exchange rates, is the expected moderation in the pace of interest rate hikes by the Federal Reserve. Notwithstanding such positive developments, ongoing global trade tensions and other major downside risks mean that global uncertainty remains elevated.

China, said the report, still had the largest local currency bond market in emerging East Asia at the end of 2018 with $9.453 trillion in bonds outstanding, 72.2 per cent of the region’s total. In Asia overall, only Japan’s is bigger at an estimated $10.668 trillion.

Emerging East Asia comprises the China, Hong Kong, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Thailand, and Viet Nam.

In a special section, the report noted the potential for the development of markets for green bonds, whose proceeds are used for the environment or climate financing. Issuance in the region between 2016 and 2018 has been led by bonds denominated in Chinese yuan, which made up 46 per cent of emerging market green bonds issued. Green bonds denominated in Indian rupee made up two percent of the total.

Another section noted that debt tends to be more expensive in markets with greater vulnerability to climate change. Higher debt costs mean projects to mitigate the physical impacts of climate change are also more costly.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. In 2018, it made commitments of new loans and grants amounting to $21.6 billion. Established in 1966, it is owned by 68 members—49 from the region.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com