Emerging East Asia’s Bond Yields Rise Amid Uncertainty Over Disinflation

MANILA  — Bond yields in emerging East Asia increased amid strengthened expectations that interest rates will remain elevated for a longer period, according to a new report by the Asian Development Bank (ADB).

Bond outflows from regional markets reached $20 billion in March–April, according to the latest edition of Asia Bond Monitor, released today. Slower-than-expected disinflation supported the likelihood of higher-for-longer interest rates and pushed up short-term and long-term bond yields in both advanced economies and regional markets.

Regional currencies depreciated against the United States dollar, and credit default swap spreads widened in most markets. Most regional equity markets posted gains supported by a sound economic outlook, but equity markets in the Association of Southeast Asian Nations (ASEAN) witnessed outflows of $4.7 billion.

“Emerging East Asia’s financial conditions remain resilient,” said ADB Chief Economist Albert Park. “But lingering geopolitical tension and adverse climate events pose upside risks to inflation, adding uncertainty over the path of disinflation. Some regional monetary authorities may hold interest rates higher for a longer period to safeguard currencies amid the uncertainty in disinflation trends and global monetary stances.”

Emerging East Asia includes ASEAN member economies; the People’s Republic of China (PRC); Hong Kong, China; and the Republic of Korea (ROK). Its local currency bond market experienced slower expansion in the first quarter of 2024 at 1.4%, reaching $24.7 trillion. Contractions in government bond issuances in the PRC and Hong Kong, China, tempered regional market expansion. But the regional corporate segment grew, supported by robust issuance in these two economies, with the PRC government implementing measures to boost the domestic economy.

Higher-for-longer interest rates overshadowed sustainable bond markets in ASEAN, the PRC, Japan, and the ROK (ASEAN+3), leading to contractions in sustainable bond issuance in the first quarter of 2024, which reached $805.9 billion by the end of March.

This market remains the world’s second-largest sustainable bond market, with an 18.9% global share, trailing the European Union’s 37.6%. However, sustainable bonds only comprise 2.1% of ASEAN+3’s total bond market, compared with 7.3% in the European Union.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.