Impact of elevated US rates: Bond yield increases in emerging East Asia, ADB report

New Delhi [India], November 27 : In a recent report by the Asian Development Bank (ADB), it was disclosed that financial conditions in emerging East Asia faced a notable downturn in the third quarter of 2023 due to anticipations of prolonged higher interest rates in the United States (US).
The report sheds light on the repercussions of elevated US interest rates on government bond yields across the region, emphasising the potential challenges and opportunities in emerging markets.
The ADB's Asia Bond Monitor revealed a weakening of financial conditions in emerging East Asia during the period between September 1 and November 10.
The primary driver behind this downturn was the US Federal Reserve's indication of maintaining higher interest rates for an extended period of time.
In response to the heightened US interest rates, government bond yields experienced an upward trend across most markets in the region.
India, the Philippines, and Thailand are the most vulnerable to the impact of higher US yields. This is due to their high inflation rates and large current account deficits.
The surge in US yields has led to a massive outflow from Asian bonds. This is because most Asian government bonds have lower yields than their US counterparts, despite higher risks. This has made foreign investors less interested in investing in them.
The implications of this phenomenon extend to various sectors, impacting investment decisions, capital flows, and regional currencies.
The US Federal Reserve's recent communication about its intent to keep interest rates elevated for an extended period significantly influenced the financial conditions in emerging East Asia.
The hawkish monetary stance contributed to capital outflows, rising risk premiums, and subdued regional equity markets.
Weak external demand, coupled with a moderating growth outlook in the People's Republic of China (PRC), added to the challenges faced by emerging East Asia.
The confluence of factors, including the Fed's stance, led to notable fluctuations in regional equity markets and increased risk premiums.
ADB Chief Economist Albert Park commented on the report's findings, noting that softer inflation in emerging East Asia in the coming years could provide regional central banks with more flexibility to support economic growth.
However, he emphasised the importance of remaining vigilant against potential financial turbulence resulting from prolonged elevated interest rates.
Bond issuance in emerging East Asia witnessed an 8.6 per cent increase from the previous quarter, reaching USD 2.5 trillion in Q3 2023.
Government bonds constituted a significant portion, expanding by 3.0 per cent and accounting for 62.4 per cent of the region's total local currency bonds outstanding.
The report highlighted the growth of sustainable bonds in ASEAN+3 to USD 734.1 billion by the end of September.
This market, used to finance environmentally and socially impactful projects, saw robust issuance of USD 57.3 billion in the third quarter.
ASEAN+3 emerged as the second-largest regional sustainable bond market globally.
The Asian Development Bank reiterated its commitment to fostering a prosperous, inclusive, resilient, and sustainable Asia and the Pacific.