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ADB: Sentiment lifts East Asian bonds

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The improving global investment sentiment and financial conditions provided a much-needed lift for local currency bond markets in emerging East Asia, despite risks from the coronavirus disease (COVID-19) pandemic, the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor says.

“Governments in the region have been agile in dealing with the impact of the COVID-19 pandemic through a wide range of policy responses, including monetary easing and fiscal stimulus,” said ADB chief economist Yasuyuki Sawada. “It is crucial that governments and central banks maintain accommodative monetary policy stances and ensure sufficient liquidity to support financial stability and economic recovery.”

Emerging East Asia is composed of the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Vietnam.

But, the ADB said government bond yields in most emerging East Asian markets declined from 15 June to 11 September on the back of accommodative monetary policies and weakening growth across the region.

Meanwhile, improving sentiment led to gains in the region’s equity markets and a narrowing of credit spreads, with most regional currencies strengthening against the United States (US) dollar.

Local currency bonds outstanding in emerging East Asia reached $17.2 trillion at the end of June, up 5.0 percent from March 2020 and 15.5 percent higher than in June 2019.

As a share of regional gross domestic product, emerging East Asia’s local currency bonds outstanding climbed to 91.6 percent at the end of June, from 87.8 percent in March, mainly due to the large amount of funding needed to fight the pandemic and mitigate its impact.

Bond issuance in the region totaled $2 trillion in the second quarter, increasing by 21.3 percent from the first quarter this year. The PRC remained home to the region’s largest bond market, accounting for 76.6 percent of the region’s total bond stock as of end-June.

The region’s government bonds outstanding reached $10.5 trillion at the end of June which accounted for 60.8 percent of the region’s aggregate bond stock. Corporate bonds, meanwhile, totaled $6.7 trillion.

A worsening and prolonged COVID-19 pandemic that could further dent the region’s economic outlook is the biggest downside risk to financial stability, prompting ADB to project a 0.7 percent contraction for developing Asia in 2020.

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