COVID-19, dimmed global outlook weigh heavily on emerging East Asian bonds

The novel coronavirus (COVID-19) pandemic and deepening global economic uncertainty are weighing heavily on local currency bond markets of emerging East Asian economies, according to the latest issue of the Asian Development Bank's (ADB) Asia Bond Monitor released on Wednesday.

"Financial markets in the region are already feeling the brunt of the effects of the COVID-19 pandemic, with foreign investment and sector activities on the downside, coupled with ongoing trade issues," said ADB Chief Economist Yasuyuki Sawada.

"Efforts to cushion the negative impacts of the pandemic through stimulus packages and monetary measures to support affected households, businesses, and financial markets should continue."

Emerging East Asia comprises China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Apart from emerging East Asia, government bond yields also declined in major advanced economies and select European markets between December 31, 2019 and February 29, 2020 as investors took a risk-averse approach and local industries lessened activities due to the global health situation.

This resulted in equity market losses in the region, weakened currencies against the US dollar and widening credit default swap spreads. Market selloffs, which were observed in some regional bond markets in January and February, will likely continue.

Several central banks in emerging east Asia have cut their policy rates to mitigate the economic impact of COVID-19 pandemic. In March, the US Federal Reserve cut rates twice, leaving its interest rates near zero, along with other measures to support financial markets.

Local currency bonds outstanding in emerging East Asia totalled 16 trillion dollars at the end of December 2019, up 2.4 per cent from September 2019 and 12.5 per cent higher than December 2018.

Bond issuance in the region, meanwhile, totalled 1.44 trillion dollars in the fourth quarter of 2019, a 9.5 per cent decline from September last year. The local currency bond markets of South Korea and Malaysia had the highest bonds outstanding-to-gross domestic product ratios in the region at 130.5 per cent and 104.6 per cent respectively.

At the end of December 2019, government bonds totalled 9.8 trillion dollars, 1.7 per cent higher than September 2019. Corporate bonds, meanwhile, reached 6.2 trillion dollars on the back of 3.5 per cent growth from September last year.

China's local currency bond market remained the largest in emerging East Asia, accounting for 75.4 per cent of the region's total.