The People’s Republic of China (PRC), Indonesia, Malaysia, Thailand, and Vietnam posted declines in yields on short-term (2-year) and long-term (10-year) government bonds from June 15 to August 27.
The decline of long-term bond yields in most markets tracked looming uncertainty about recovery prospects amid rising covid-19 cases.
Equity indexes dropped and currencies depreciated in most emerging East Asian markets, while foreign portfolio investments flowed outward.
Local currency bond markets in emerging East Asia grew to $21.1 trillion at the end of June, driven by the continuing increase in government bond issuance. Governments continued to tap local currency bond markets to support pandemic containment and recovery.
Outstanding local currency bonds increased 2.9%, accelerating from 2.2% the previous quarter.
Government bonds increased 3.3% to $13.1 trillion, compared with 2.1% growth in the previous quarter.
"The emergence of COVID-19 variants and renewed mobility restrictions in some places are stifling the earlier momentum toward a sustained recovery," said ADB Acting Chief Economist Joseph Zveglich Jr in a press release on Wednesday.
"However, financial conditions in emerging East Asian economies remain stable, even as they cope with the continuing uncertainty. Some central banks have used small-scale asset purchase programs to improve bond market liquidity and boost private investor confidence. Long-term debt is making up more of the region’s local and foreign currency debt structure, and the region’s sustainable bond markets are expanding," he explained.
Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.
Growth in sustainable bonds in the Association of Southeast Asian Nations (ASEAN) economies jumped to 30.4% from 0.6% in the prior quarter, reaching $23.6 billion at the end of June. Sustainable bonds in the ASEAN region plus the PRC; Hong Kong, China; Japan; and the Republic of Korea totaled $345.2 billion, equivalent to 19% of global sustainable bond stock.
Green and sustainability bond issuance in the region during the first half of 2021 exceeded the issuance for all of 2020.
Market risks remain rooted in the resurgence of covid-19 and its impact on the region’s economic recovery.
Coupled with a strong recovery in the United States (US), this could push further capital outflows and local currency depreciation that will increase external debt burdens.
Potentially higher US bond yields could spill over to the region and increase local currency financing costs.