Higher Bond Yields in Developed Markets Spill Over to Emerging East Asia

Emerging East Asia’s total local currency bond issuance rose 7.1% to an all-time high of $9 trillion in 2021, according to the latest issue of the Asia Bond Monitor, released today by the Asian Development Bank (ADB). For the last three months of the year, emerging East Asia’s local currency bond stock grew 3.6% from the previous quarter to $22.8 trillion.

Bond yields in the region rose between 30 November and 9 March, amid global inflationary pressure and rising yields in advanced markets.

“Financial conditions in emerging East Asia remain robust, backed by ample liquidity,” said ADB Chief Economist Albert Park. “Most central banks in the region have maintained accommodative monetary stances, even as advanced economies tightened policies. However, continued inflationary pressure may cause more central banks around the world to tighten, which could reduce liquidity and weaken financial conditions.”

Risk premiums have edged up amid dampened investor sentiment due to expected monetary tightening by the United States (US) Federal Reserve and the Russian invasion of Ukraine. The Federal Reserve hiked interest rates on 16 March for the first time since 2018 and signaled additional increases on the horizon as inflation picks up, partly due to war-related increases in oil and food prices. Global supply chain disruptions and the uncertain trajectory of the coronavirus disease (COVID-19) pandemic are also threatening the global economic outlook.

Association of Southeast Asian Nations (ASEAN) member economies saw record-high local currency bond issuance of $1.5 trillion last year. That accounted for 17% of the total issuance in emerging East Asia, which comprises the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Government bonds outstanding in the region totaled $14.3 trillion at the end of 2021, while corporate bonds increased to $8.5 trillion. Growth in the corporate bond segment eased in the final quarter of the year, amid a slowdown in the PRC, the region’s largest corporate bond market.

Faster growth in both the government and corporate bond segments pushed Viet Nam’s local currency bond market up by 9.8% from the previous quarter to $91.5 billion at the end of December 2021. Annual growth also quickened, to 25.5%.

Government bonds increased 5.3% from the previous quarter to $65.3 billion. A jump in issuance drove a 22.7% expansion in the corporate bond segment. Corporate bonds outstanding totaled $26.3 billion.

Sustainable bond stock in the ASEAN region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea rose to $430.7 billion at the end of 2021 from $274.1 billion a year earlier. Green bonds continue to dominate the region’s sustainable bond market, accounting for 68.2% of the total, although interest in social and sustainability bonds is also growing.

The latest issue of the Asia Bond Monitor features discussions of foreign participation in the Asian local currency bond market and associated financial stability risks, as well as determinants of sovereign local currency bond issuance in emerging markets. The issue also presents the results of the 2021 AsianBondsOnline Annual Bond Market Liquidity Survey.

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 68 members—49 from the region.