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.

“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 the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Apart from emerging East Asia, government bond yields also declined in major advanced economies and select European markets between 31 December 2019 and 29 February 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 the COVID-19 pandemic, including the People’s Bank of China, Bank of Thailand, Bank Indonesia, Bangko Sentral ng Pilipinas, Bank of Korea, Bank Negara Malaysia, Hong Kong Monetary Authority, and State Bank of Vietnam. 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 totaled $16 trillion at the end of December 2019, up 2.4% from September 2019 and 12.5% higher than December 2018. Bond issuance in the region, meanwhile, totaled $1.44 trillion in the fourth quarter of 2019, a 9.5% decline from September last year. The local currency bond markets of the Republic of Korea and Malaysia had the highest bonds outstanding-to-gross domestic product ratios in the region, at 130.5% and 104.6%, respectively.

At the end of December 2019, government bonds totaled $9.8 trillion, 1.7% higher than September 2019. Corporate bonds, meanwhile, reached $6.2 trillion on the back of 3.5% growth from September last year. The PRC’s local currency bond market remained the largest in emerging East Asia, accounting for 75.4% of the region’s total.

The latest issue of the Asia Bond Monitor includes four discussion boxes, which look at the economic impact of the COVID-19 pandemic on economies in developing Asia and specific channels where the economic impact will be felt; reactions of the region’s equity markets as the COVID-19 pandemic continues to evolve; the importance and potential of green bonds as sources of capital during periods of market stress; and the impact of environmental, social, and governance factors on portfolio performance.