Cost of money remains cheap in Asia, says ADB

Bond yields in emerging East Asian markets fell between December 31 and mid-February despite the risk of accelerated pace of interest rate hikes in the United States (US), the Asian Development Bank’s (ADB) latest Asia Bond Monitor said.

“Emerging East Asia’s improved growth outlook and strong fundamentals have buffeted the region from risks of possible capital outflows,” ADB Chief Economist Yasuyuki Sawada said.

“Policies to improve the transparency of financial markets and encourage long-term investment can help countries face future external shocks,” Sawada added.

Amidst solid growth and rising inflation, investors across most of the region have shown increased confidence in emerging East Asian local currency (LCY) government bonds, leading to declining yields.

Indonesia’s implementation of sound reforms led it to experience the largest decline in yields over the period. The People’s Republic of China (PRC), meanwhile, saw yields on 2-year and 10-year government bonds rise, as the government introduced new measures to protect against asset and credit risks.

All of the region’s currencies appreciated against the US dollar, except for the Hong Kong dollar and the Philippine peso. Equity markets also rose in the region.

Emerging East Asia’s outstanding local currency bonds reached $10.2 trillion by end-December, with growth moderating on both a quarter-on-quarter and year-on-year basis.

Government bonds account for 64.6 percent of the regional total. The PRC remains the region’s largest bond market, with outstanding bonds standing at $7.1 trillion — or 70 percent of the region’s total.

The report highlights several risks for the region’s bond markets as the global economy recovers.

These include the acceleration of rate hikes by the US Federal Reserve, uncertainty over policies in major developed economies, particularly the US and the eurozone, and the depreciation of the Chinese renminbi, which challenges growth prospects in Asia.