The looming threat of "fiscal cliff" in the U.S. and a slowdown in Chinese economic growth along with volatile capital inflows posed risks to Asian bond market growth, the Asian Development Bank (ADB) said in a report on Thursday.
Emerging East Asia's local currency bond markets continued to expand, but risks loom large on the horizon, the lender warned in the report titled 'Asia Bond Monitor.'
"There are a number of downside risks to the local bond markets. The US could fall over the fiscal cliff and the new Chinese leadership has to deal with slowing growth in the world's second largest economy," said Iwan Azis, Head of ADB's Office of Regional Economic Integration.
"A surge in volatile capital inflows and rising inflation in the region are also potential threats," Azis said.
Volatility spillovers from mature markets to local bond markets are another major risk, according to ADB. The report showed that external shocks and volatility are also increasingly being transmitted between domestic markets and between markets across Asia.
The report pointed out that bond yields fell in most countries in the third quarter on the back of moderating inflation, strong economic performance and steady investor demand, with the exception of China, where concerns over slower economic growth and inflation have pushed yields higher.
The region's local currency bond market was 3.5 percent bigger than at end of June 2012 at $6.2 trillion, and 11 percent larger than at the end of September 2011. Government bonds continue to dominate with $4.1 trillion outstanding at the end of September, 3.1 percent more than at the end of June.
However, corporate bond markets continued to expand at a faster rate than their sovereign counterparts though with $2.2 trillion outstanding at the end of September, up 4.2 percent on quarter.
The report also revealed that there was an uptick in liquidity in both government and corporate bonds this year for the region as a whole. Increased investor diversity, greater availability of hedging instruments, and more transparency are key to boosting activity in emerging East Asia's local currency bond markets, the report added.
The Asia Bond Monitor assesses the markets of China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, Taiwan and Vietnam.
by RTT Staff Writer
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