KUALA LUMPUR (June 23): Bond yields in emerging East Asian markets continued their downward trend between 1 March and mid-May as optimism in global economic prospects gained pace, according to the the Asian Development Bank’s (ADB) Asia Bond Monitor.

In a statement on its website yesterday, ADB chief economits Yasuyuki Sawada said strong economic fundamentals are helping emerging East Asian markets to realise gains from the improved global outlook.

“Policy efforts should continue to encourage investments in emerging East Asia while safeguarding the region’s financial stability,” he said.

The ADB said that among local currency (LCY) government bond markets in the region, Indonesia experienced the largest decline in yields as it benefited from positive investor sentiment and a credit rating upgrade.

The bank said bond market expansion slowed in China — the largest LCY bond market in emerging East Asia — amid debt concerns and the China government’s associated deleveraging efforts.

ADB said total outstanding LCY bonds reached US$10.5 trillion by end-March, despite an overall slowdown in new issuance in the first quarter of this year at US$852 billion, down from the US$946 billion of the previous quarter.

It said government bonds accounted for US$6.8 trillion or 64.9% of the region’s total bond stock, with corporate bonds accounting for the rest.

The report highlighted several risks that the emerging East Asian bond markets will likely face in the coming months despite favorable macroeconomic conditions, including tightening global liquidity conditions and the vulnerability of financial markets to cyberattacks.

The report empirically analysed whether LCY bond market development promotes financial stability in emerging markets.

The analysis found that expansion of LCY bond markets reduces the depreciation of exchange rates in emerging markets in the face of global financial shocks, pointing to a stabilizing role of LCY bond markets.