Strong fundamentals such as high levels of foreign reserves will help emerging East Asia withstand the short-term impacts of a likely US rate hike, said Juzhong Zhuang, ADB's Deputy Chief Economist.
Local currency bond yields increased in nearly all markets in emerging East Asia which saw upticks in the 2-year and 10-year bond yields except for the People's Republic of China's (PRC) 2-year bond, which was unchanged.
All of the region's currencies depreciated against the US dollar in the wake of the US election. Equity markets weakened throughout the region except in the PRC and Singapore.
Emerging East Asia's outstanding local currency bonds grew by 3.3% quarter-on-quarter and 19.2% year-on-year, reaching $10.4 trillion by end September. Local currency bond issuance, meanwhile, fell to $1.2 trillion in Q3 2016 from $1.3 trillion in Q2 2016 due to a contraction in bond sales in the PRC and the Republic of Korea. The PRC remains the region's largest bond market, accounting for 68.8% of total bond stock, valued at $7.2 trillion.
The report notes several risks for emerging East Asian bond markets. These include market reactions to the prospective rate hike by the US Federal Reserve and the uncertainty with respect to the economic policy of the new US administration. Further, continued global risk aversion toward emerging markets and the threat of rising protectionism could unsettle the region's markets. A hard Brexit could also have repercussions for emerging East Asia due to the region's financial links with Europe.
The Asia Bond Monitor also reports findings from its annual bond market survey which provides an assessment of emerging East Asian bond market liquidity. The survey conducted in late September and early October noted that overall liquidity conditions improved in 2016 from a year earlier. Survey respondents said that diversifying investors in bond markets is the most important factor to help improve liquidity in the region's bond markets.
The report includes a special chapter that explores the determinants of infrastructure bond market development in Asia and derives policy implications for the region. The report finds that while meaningful progress has been made in the development of infrastructure bond markets, supported by the Association of Southeast Asian Nations Plus Three (ASEAN+3) regional financial cooperation initiatives, multilateral institutions can further help develop infrastructure bond markets in the region through credit guarantees.
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