ISLAMABAD: The Asian Development Bank in its latest Asia Bond Monitor warned that although emerging East Asia's local currency bond markets continue to expand and are performing well, but risks loom large on the horizon.
Volatility spill overs from mature markets to local bond markets are another major risk, it said.
The report showed that external shocks and volatility are also increasingly being transmitted between domestic markets and between markets across Asia as they expand and their influence grows.
This means that regulators in Asia need to monitor and coordinate market policies nationally as well as regionally and globally, it added.
Bond yields fell in most countries in the third quarter on the back of moderating inflation, strong economic performance, and steady investor demand.
The region's bond markets are, however, increasingly diverse in terms of growth rates, issuance, and yields.
At $6.2 trillion, the region's local currency bond market was 3.5% bigger than at end of June 2012 and 11.0% 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% more than at the end of June.
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% on quarter, with most markets posting growth.
The report's annual liquidity survey showed an uptick in liquidity in both government and corporate bonds for the region as a whole.
The survey showed that 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.
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