Emerging East Asia’s local currency bond markets have expanded to nearly $6 trillion, but policymakers in the region should brace themselves for further shock and volatility from the global financial markets, says a report published by the Asian Development Bank (ADB).
“Our local currency bond markets are emerging as a safe haven in the midst of the crisis, but we should not be complacent,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration, which produced the Asia Bond Monitor report.
“Volatile markets can deter long-term investment and hurt the economy by making it costlier for governments and companies to raise funds. Moreover, uncertain market reaction to policy action is undermining the predictability and thus the effectiveness of conventional policymaking,” Azis said.
Greater regional participation in emerging East Asia’s bond markets and cooperation are needed to counter the volatility from external shocks and to strengthen regional financial safety nets.
A special section in the Asia Bond Monitor shows that the spillover of the Lehman Brothers’ collapse and the ongoing eurozone crisis in many markets has been significant and may well continue.
These spillover impacts will be felt not only in the bond markets but in other financial markets in the region too, including through foreign exchange rates.
The Asia Bond Monitor notes that despite the uncertainty and volatility in global financial markets, the bond markets in the region continue to expand, with $5.9 trillion in paper outstanding at the end of June, 1.9% more than at the end of March and 8.6% more than at the end of June 2011.
Overall, corporate bond market growth is still outpacing the expansion of the government bond markets, as corporate bond yields have fallen and tighter bank lending has encouraged firms to tap the capital markets.
As of the end of June, there were $2.0 trillion in corporate bonds outstanding, 15.2% higher than a year earlier, while the $3.9 trillion government bond market was only 5.5% bigger.
