Moderating inflation and expectations of policy rate cuts underpinned an improvement in emerging East Asia’s financial conditions, leading to declining bond yields in both advanced and regional markets.
The financial markets in emerging East Asia rebounded, according to the latest issue of Asia Bond Monitor released by the Asian Development Bank (ADB) on September 16, starting in July when the US Federal Reserve hinted at an interest rate cut in September. This led to the appreciation in emerging East Asia currencies against the US dollar and a narrowing in risk premiums.
In the meantime, gains were noted in the regional equity markets, except in China and Hong Kong, where weak economic performance weighed on equity performance. Overall, the ADB notes the equity market in the region recorded inflows of US$7.6 billion during the review period.
“Policy rate cuts are forthcoming in both advanced and regional markets, which will strengthen financial conditions in emerging East Asia,” says ADB chief economist Albert Park. “However, downside risks remain, such as weaker-than-expected economic performance in China and the escalation of geopolitical concerns. In general, risks to the regional financial outlook remain balanced.”
The emerging East Asia local currency (LCY) bond market, the ADB notes, expanded 2.3% to US$25.1 trillion at the end of June this year from the first quarter. Government bond issuance climbed 27% quarter on quarter to US$1.1 trillion, driven by the higher offering in China to support economic activities. South Korea posted a quarterly increase of 15.4%, in line with the government’s frontloading policy during the first half of 2024.
Corporate bond issuance, on the other hand, rose 5.6% to US$860.9 billion, with higher volumes in China and most Asean markets. China’s issuance activity was driven by the 62.7% quarter-on-quarter increase in financial bonds as banks raised capital to comply with regulatory requirements. Issuance in the Association of Southeast Asian Nations (Asean) region collectively rose by 25.4% as bond yields eased on expectations of a rate cut by the US Federal Reserve.
The share of Asean countries’ outstanding bonds in the emerging East Asia overall LCY bond market remained below 10%. At the end of June, the aggregate amount of Asean LCY bonds outstanding amounted to US$2.2 trillion, with Singapore accounting for the largest share at US$600 billion, while Vietnam’s share was the smallest at US$100 billion.
Banks and insurance companies continued to hold the largest shares of emerging East Asian LCY bonds. At the end of June, banks held an average share of 36.2% of the outstanding LCY bonds in the region, while the insurance companies accounted for 28.9%. In Vietnam, banks, insurance companies and pension funds are the only two major investor groups collectively accounting for a 99.5% share of the holdings at the end of March.
Among the regional bond markets, only the central bank of Indonesia has substantial holdings of bonds, accounting for a 23.1% share at the end of June as Bank Indonesia continues to actively support the LCY bond market, particularly during market sell-offs. Meanwhile, the region’s average holdings share of foreign investors for treasury bonds stood at 10.6% in the first quarter of 2024. Malaysia had the largest foreign holdings at 21.2%, followed by South Korea with 19.2%
Meanwhile, sustainable bonds in Asean, China, Japan and South Korea – collectively known as Asean+3 – surged 17.4% year-on-year to US$868.1 billion at the end of June. Issuance in the second quarter rebounded to US$51 billion after contracting 10.7% in the previous quarter. About 69.6% of Asean+3 sustainable bond issuance in the second quarter was financed by short-term maturities, or tenors of less than five years.
