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MANILA – The Asian Development Bank on Monday warned emerging East Asian bond markets to “brace for further shock and volatility” as investment flows to the region surged to almost $6 trillion.
“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 the ADB Office of Regional Economic Integration, which on Monday issued the latest edition of the Asia Bond Monitor.
“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, he said.
In the latest Asia Bond Monitor, the ADB said 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 Manila-based lender said.
The ADB said bond markets in the region continue to expand, with $5.9 trillion in paper outstanding at end-June, or 1.9 percent more than at end-March and 8.6 percent more than at end-June 2011.
Corporate bonds alone reached $2 trillion, or 15.2 percent more than a year ago, while government debt securities of $3. trillion are 5.5 percent higher.
The report said the corporate sector has outpaced the growth in government bond markets as falling yields and tighter bank lending push companies to tap the capital markets.
The ADB said bond yields in China, Indonesia and Vietnam picked up in July-August after falling in the first six months of the year.
“The risks to the markets are growing. Those risks include worsening investor sentiment as global economic outlook dims, volatile capital flows, and excessive government bond sales to finance stimulus measures,” the report said.
China remains emerging East Asia’s largest bond market with $3.5 trillion in bonds outstanding at end-June, 1.5 percent more than three months earlier and 6.9 percent more than a year earlier.
On a quarter-on-quarter basis, the fastest growing markets were Vietnam, Thailand, and Indonesia, which expanded 10.5 percent, 4.1 percent and 3.6 percent, respectively.
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