Aggressive monetary tightening in advanced economies has pushed up bond yields and worsened the downturn of financial conditions in emerging East Asia, according to a report from the Asian Development Bank (ADB).

Regional currencies fell against the US dollar, equities dropped, and risk premiums widened between August 31 and November 4, according to the latest update in the Asia Bond Monitor. Portfolio outflows were also seen in most regional bond markets. Global inflation, slower growth in China, and the economic fallout from the Russia - Ukraine conflict continued to threaten the region’s short-term prospects.

“Financial conditions in emerging East Asia weakened at a faster pace in September and October than in the first eight months of 2022, due to aggressive tightening by the US Federal Reserve,” said Mr. Albert Park, Chief Economist at ADB. “However, the region remains largely resilient so far, despite various headwinds.”

Local currency bond issuances in emerging East Asia contracted 1.1 per cent from the previous quarter to $2.2 trillion in the third quarter of this year, amid subdued investment sentiment. Local currency bonds outstanding grew 2.3 per cent to $22 trillion. Emerging East Asia comprises member economies of ASEAN, China, Hong Kong (China), and South Korea.

Government bond issuances dropped 4.5 per cent from the previous quarter, while corporate bond issuances grew 5.7 per cent, largely supported by Chinese companies taking advantage of domestic monetary easing measures. Rising interest rates drove a 2.0 per cent decline in corporate bond issuances in ASEAN markets.

The sustainable bond market in the ASEAN region plus China, Hong Kong (China), Japan, and South Korea grew 1.7 per cent to $521.6 billion as of the end of September. While growth was slower than in the previous quarter, the segment witnessed improved diversification in terms of market profile and bond types.

After strong growth in the previous quarter, Vietnam’s local currency bond market contracted 0.2 per cent due to a decline in the government bond market and slower growth in corporate bonds. On an annual basis, the market increased 21.1 per cent to $97.4 billion.

Government bonds contracted 2.0 per cent as the outstanding stock of central bank bills fell 70.3 per cent from the previous quarter. Outstanding government bonds reached $67.3 billion. Expansion of corporate bonds moderated to 4.1 per cent from the previous quarter, putting the segment at $30.1 billion.