Manila: Bond yields in emerging East Asia diverged due to market-specific factors, while uncertainty about the covid-19 pandemic and concerns over inflationary pressure led to subdued investor sentiment, according to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.
Yields on short-term (2-year) government bonds from 28 February to 21 May largely declined on the back of accommodative liquidity conditions. Uneven recovery paths and market-specific economic fundamentals, meanwhile, caused long-term (10-year) government bond yields to diverge across the region. The People’s Republic of China (PRC); Hong Kong, China; Indonesia; and Viet Nam posted declines in yields on both short-term and long-term government bonds, while the Republic of Korea, Malaysia, and the Philippines posted increases.
Emerging East Asia’s local currency bond market expanded to $20.3 trillion at the end of March this year. The bond market growth moderated in the period ended 31 March, slipping to 2.2% from 3.1% in the previous quarter, as governments in the region sought to balance fiscal policy and the private sector remained cautious amid renewed outbreaks and uneven vaccine rollouts.
"Persistent uncertainty surrounding the COVID-19 pandemic and looming inflationary pressure have put a dent in emerging East Asia’s bond markets, leading to volatility and mixed performances in the region’s financial and equity markets," said ADB Chief Economist Yasuyuki Sawada in a press release on Friday.
"The region’s fast-expanding sustainable bond markets, underpinned by a growing interest in a green and inclusive recovery and conducive public policies, will be key to the region’s efforts to rebuild smarter after the pandemic," Sawada added.
Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.
The COVID-19 pandemic remains the biggest risk to the region’s bond markets. Renewed outbreaks, the emergence of new virus variants, and slower-than-expected vaccine rollouts in some markets may hamper economic activity. Concerns that the US Federal Reserve might tighten monetary policy in response to growing inflationary pressure are weighing on financial conditions in the region.
Emerging East Asia’s bond market was equivalent to 96.4% of the region’s economic output in the first quarter of 2021. Government bonds in emerging East Asia totaled $12.6 trillion at the end of March, representing 61.8% of the region’s total bond stock. The PRC remained the region’s largest bond market, accounting for 77.8% of emerging East Asia’s bonds outstanding.
Sustainable bond markets in the ASEAN region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea totaled $301.3 billion at the end of the first quarter, growing 13.2% from the previous quarter and 44.5% from a year earlier. The region’s market now accounts for about 20% of the global sustainable bond market, making it the largest after Europe’s.
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