OREANDA-NEWS. March 18, 2016.  Yields of local currency bonds in most emerging East Asian markets remained on a downward trajectory in the first month and a half of 2016, pressured by worries over global growth prospects and still lackluster economic performances in industrialized economies, the Asian Development Bank’s (ADB’s) latest Asia Bond Monitor said.

“Lower yields reflect the abundance of liquidity and weak news about the world economy, including in advanced economies,” said Shang-Jin Wei, ADB’s Chief Economist. “As we are seeing some re-flow of international capital back to emerging market economies, it is important to watch out for risks of over-leveraging in these countries.”

The report notes that recent actions by central banks in major industrialized countries, including the United States, Japan and in the Eurozone have signaled to investors that slower growth is likely to continue in the near term. However, a gradual and cautious hike in US rates going forward, combined with the market factoring in a normalization of US monetary policy, should limit any sharp selloff of East Asian bonds, despite an uptick in risks to the region.

Yields for most local currency bonds—including closely watched 10-year bonds—decreased in nearly all emerging East Asian markets in the first month and a half, with the exception of the People’s Republic of China (PRC) and Hong Kong, China. Credit default swaps over the same period remained volatile, reflecting the concerns about the global economy, with risk premiums for East Asian bonds rising. The decline in bond yields paralleled declines in most stock markets in the region, with the exceptions of Indonesia and Thailand.

Emerging East Asia’s outstanding local currency bonds grew 5% quarter-on-quarter, and were up almost 18% year-on-year, totaling over \\$9.1 trillion as of end-December. The PRC remains, by far, the largest market, accounting for more than two-thirds of the total outstanding bond stock. Bonds as a share of the region’s gross domestic product rose to nearly 64% in 4Q15, from almost 62% in 3Q15, with issuance of over \\$1 trillion in the last quarter.

Foreign exchange markets in the region were mixed in the first month and a half of 2016, with the Republic of Korea won down 3% and the Philippine peso weakening 1.2%, both against the US dollar. By contrast the Indonesian rupiah and Malaysian ringgit appreciated by 3.3% and 3.8%, respectively, against the US dollar. Other currencies were mostly stable.

Moving forward, the report notes risks to East Asian bond markets across a number of areas, including a US Federal Reserve rate hike, which could generate outflows from the bond market; further strengthening of the US dollar, which could raise funding challenges for companies in Asia that have borrowed in the currency; and a broader loss of confidence in emerging markets by foreign investors, amidst weak global economic activity.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.