The ADB said in its Asia Bond Monitor report on November 20 that the expansion of the local currency bond market was mainly thanks to a 4.0 percent on-quarter growth in government bonds to US$51.0 billion as the State Bank of Viet Nam increased issuance of central bank bills.
The overall expansion was slightly tempered by a 2.8 per cent contraction on quarter in the corporate bond market to US$5.0 billion. The corporate bond market still posted growth of 4.2 per cent on year.
Emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019 despite persistent trade uncertainties and a global economic downturn.
“The ongoing trade dispute between China and the US and a sharper-than-expected economic slowdown in advanced economies and China continue to pose the biggest downside risks to the region’s financial stability,” said ADB chief economist Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep financial conditions stable.”
Emerging East Asia comprises China, Hong Kong (China), Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
Local currency bonds outstanding in emerging East Asia reached US$15.2 trillion at the end of September. This was 3.1 percent higher than at the end of June. Local currency government bonds outstanding totaled US$9.4 trillion, accounting for 61.8 percent of the total, while the stock of corporate bonds was US$5.8 trillion. A total of US$1.5 trillion in local currency bonds were issued in the third quarter, up 0.9 percent versus the previous three months.
China remained emerging East Asia’s largest bond market at US$11.5 trillion, accounting for 75.4 percent of emerging East Asia’s outstanding bonds. Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds.
The report also examines the relationship between bond market development and the risk-taking behavior of banks. The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions. This suggests bond market development can contribute to the soundness of the banking system.
An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018. It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.