Financial conditions in emerging East Asia weakened between March 1 and May 31 this year on the back of the delay in the expected interest rate cut by the US Federal Reserve. A slower-than-expected disinflation path 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.
These developments led to bond outflows from regional markets amounting to US$20 billion in March-April, according to the latest issue of Asia Bond Monitor, published by the Asian Development Bank (ADB) on June 26. The Asean equity markets also experienced US$4.7 billion in outflows, although most of the regional equity markets recorded gains during the review period due to domestic factors.
The ADB says the delay in the Fed's expected rate cut and the hawkish tones from its officials contributed to the weakening financial conditions in the regional markets with the regional currencies depreciating against the US dollar. Credit default swap spreads widened in five out of seven markets in which data are available.
Despite this market backdrop, ADB chief economist Albert Park says emerging East Asia’s financial conditions remain resilient, although he points out that lingering geopolitical tensions 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,” he adds.
The ADB notes that the local currency (LCY) bond market in emerging East Asia exhibited a slower growth in the first quarter of 2024 at 1.4%, amounting to US$24.7 trillion, compared with the 1.8% increase in the previous quarter. Contractions in government bond issuances in China and Hong Kong tempered the regional market expansion during the period.
On the other hand, the regional corporate bonds outstanding rose 1.2% quarter-on-quarter in the first three months of 2024 underpinned by robust corporate offerings in China and Hong Kong that followed China’s introduction of easing measures to boost the domestic economy. The outstanding LCY bonds among the Asean member countries reached US$2.2 trillion at the end of March this year, accounting for 8.9% of the emerging East Asia total.
LCY treasury bonds in emerging East Asia remained largely held by passive investor groups, with some regional markets witnessing improved investor diversity in the first quarter of 2024, according to ADB. Banking institutions were the largest treasury bond holders in the region, accounting for 36.6% of the treasury bonds outstanding at the end of March.
The share of bank holdings was highest in China at 70%, followed by the Philippines at 46.9%. The next largest investor group comprised insurance companies and pension funds at 28.9%, whose holdings were highest in Vietnam at 60.8%, Thailand at 43.1% and Malaysia at 35.2%.
Meanwhile, the Asean+3 (China, Japan and South Korea) sustainable bond market grew 21.4% on an annual basis to reach US$805.9 billion at the end of March this year. It continued to account for the world’s second largest regional sustainable bond market at the end of the first quarter with a global share of 18.9%, trailing only European Union 20, which accounted for 37.6%.
