Long-Term Bond Yields Decline in Emerging East Asia

Long-term bond yields in emerging East Asia declined between 15 June and 24 August amid mounting risks and a dimming economic outlook, even as financial conditions eased modestly, according to a report by the Asian Development Bank (ADB).

Yields of 10-year local currency government bonds dropped while yield curves flattened, according to the latest issue of Asia Bond Monitor, released today. Both are typically signals that investors expect slower economic growth. Currencies in the region continued to depreciate against the US dollar amid the weaker outlook.

Financial conditions in emerging East Asia eased moderately from mid-July to mid-August, when equity markets rallied, risk premiums narrowed, and portfolio inflows returned amid speculation that the United States Federal Reserve would slow the pace of interest rate hikes.

However, ongoing and renewed risks have continued to weigh down investor sentiment, including concerns about persistent inflation, faster-than-expected US monetary tightening, lingering impacts of the COVID-19 pandemic, a greater-than-expected slowdown in the People’s Republic of China (PRC), and the protracted fallout from the Russian invasion of Ukraine.

“Market optimism over a milder US Federal Reserve tightening supported a modest improvement in financial conditions,” said ADB Chief Economist Albert Park. “But this seems to have been short-lived, as the Fed has been pretty clear in recent weeks that further interest rate hikes are likely. Financial conditions in the region may continue to tighten.”

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

The region’s bond market saw record-high issuance in the second quarter of this year, driven mostly by the PRC’s efforts to stimulate the economy. Regional bond stock rose to $22.9 trillion at the end of June. Issuance in economies belonging to the Association of Southeast Asian Nation (ASEAN) rose 10.3%, expanding the bloc’s share of regional bond issuance to 17.5%.

Government bond issuance jumped 25.9% from the previous quarter, as governments borrowed to support economic recovery. Outstanding government bonds reached $14.5 trillion.

Meanwhile, corporate bond issuance dipped 4.9% amid the weak economic outlook and rising borrowing costs, bringing the total corporate bond stock to $8.4 trillion. The size of the sustainable bond market in the ASEAN region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea grew modestly on lower overall investment appetite, reaching $503.5 billion.

Viet Nam’s local currency bond market grew 8.1% from the previous quarter to $99.5 billion. The faster expansion was driven by both the government and corporate bond segments. The market increased 31.6% from a year earlier. Government bonds increased 7.4% from the previous quarter, driven by growth in central bank bills, to $69.8 billion. Corporate bonds climbed 9.5% from the previous quarter to about $30 billion, driven by hefty issuance.