International Finance

Synchronized global upswing underpins higher Asian bond yields

ADB cites strong macroeconomic fundamentals and tightening liquidity as the main sources for rising yields across most emerging East Asian bond markets

Bond yields in emerging East Asian markets rose between 1 September and end-October as the global economy entered its most robust period of synchronized growth since the Global Financial Crisis, according to a new report from the Asian Development Bank (ADB).

In the latest quarterly issue of the Asia Bond Monitor, ADB cites strong macroeconomic fundamentals and tightening liquidity as the main sources for rising yields across most emerging East Asian bond markets, but noted that further monetary tightening by advanced-economy central banks will require vigilance by the region’s financial market regulators.

“Emerging East Asia currently enjoys strong growth and relative financial stability, which is conducive for further deepening of the region’s local currency bond markets,” said Yasuyuki Sawada, ADB Chief Economist. “Policymakers need to take advantage of the benign external environment to strengthen prudential regulations, diversify the region’s investor base, and plan for the long-term demographic changes underway across much of the region.”

The report notes the importance of maintaining healthy sovereign credit ratings among emerging East Asian governments. Indonesia’s credit rating was recently upgraded to investment grade, demonstrating a broader trend across the region. Sovereign ratings matter because they act both as a benchmark for investors and credit ratings of corporates, which are often limited by the sovereign rating of their economies.

Among emerging East Asian local currency (LCY) government bond markets, nearly all economies experienced rises in yields through end-October. The only exception was Viet Nam, where the yield fell following the central bank’s policy rate cut in July.

The Asia Bond Monitor’s annual market liquidity survey showed improving liquidity conditions in 5 out of the 9 markets: Hong Kong, China; Indonesia; Singapore; Thailand; and Viet Nam. Liquidity conditions remained unchanged to tighter in the People’s Republic of China (PRC), the Republic of Korea, Malaysia, and the Philippines.

Bond market expansion accelerated to 4.2% quarter-on-quarter and 11.6% year-on-year in the region, reaching $11.6 trillion at the end of September. The PRC—the largest LCY bond market in emerging East Asia—continued to drive the region’s bond market growth. Government bonds dominate the region’s total LCY bond stock, accounting for $7.7 trillion or 66.5% of the total, with the remaining $3.9 trillion comprised of corporate bonds. Foreign investment in the region’s bond markets remains robust. In a special theme chapter, the report explores the drivers of foreign and domestic participation in local bond markets.

Overall, the region’s LCY bond markets are performing well, reflecting favorable economic and financial conditions. Nevertheless, some risks loom. The most salient risk is tightening global liquidity conditions stemming from US monetary policy normalization. A more long-term risk is longevity risk—the risk that people will live longer than expected—associated with the region’s rapid population aging. Financial markets and related financial products can help mitigate longevity risk.

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