Elevated US rates push up bond yields in emerging East Asia

The US Federal Reserve recently signaled its intention to retain higher interest rates for a longer period. This contributed to a weakening of financial conditions in emerging East Asia between 1 September and 10 November, according to the latest edition of the Asia Bond Monitor released on November 27th 2023. 

Source: ADB

Weak external demand and a moderating growth outlook in the People’s Republic of China (PRC), combined with the Federal Reserve’s hawkish monetary stance, pushed down regional equity markets and drove up risk premiums. Capital outflows were recorded in the region’s equity and bond markets. A stronger US dollar on the back of higher US interest rates also weighed on regional currencies. 

Emerging East Asia comprises member economies of the Association of Southeast Asian Nations (ASEAN); the PRC; Hong Kong, China; and the Republic of Korea.

“We see softer inflation in emerging East Asia in the next few years, which is a welcome development as regional central banks may have more room to support economic growth,” said ADB Chief Economist Albert Park. “At the same time, they should remain vigilant against financial turbulence in the face of interest rates remaining elevated for a longer period. Strengthening economic fundamentals will safeguard financial stability and support growth.”

Bond issuance in emerging East Asia grew 8.6% from the previous quarter to $2.5 trillion in the third quarter of this year. Local currency bonds outstanding in the region increased 2.5% to $23.5 trillion. Government bonds expanded 3.0% amid increased issuance and accounted for 62.4% of the region’s total local currency bonds outstanding. Corporate bonds outstanding rose 1.5%.

The resumption of the State Bank of Vietnam’s issuance of central bank securities drove the economy’s local currency bond market to expand 3.9% from the previous quarter. At the end of September, bonds outstanding totaled $108.6 billion. Growth in government bonds slowed due to the low volume of maturities and a decline in issuance during the quarter. Corporate bonds contracted 3.1% quarter-on-quarter due to the large volume of maturities in the third quarter of 2023. 

Viet Nam’s government bond yields climbed across all tenors for the period 1 September and 10 November driven by a rise in inflation and the US Federal Reserve’s decision to keep interest rates high for an extended period. Consumer price inflation rose from 2.1% year-on-year in July to 3.6% year-on-year in October, but remained below the government’s 4.5% target for the full year 2023. 

Sustainable bonds outstanding in ASEAN plus the PRC, Japan, and the Republic of Korea (ASEAN+3), which are used to finance projects and programs with positive environmental and social impacts, reached $734.1 billion at the end of September, following robust issuance of $57.3 billion in the third quarter. ASEAN+3 accounted for 36.3% of the total global sustainable bond issuance in Q3 2023, making it the second largest regional sustainable bond market in the world. ASEAN markets contributed 7.4% of the total ASEAN+3 issuance./.