HONG KONG: Emerging Asia's local currency government bond yields will rise this year as central banks raise interest rates to keep a lid on inflationary pressures, the Asian Development Bank said in a report on Tuesday.
Inflation across the region has picked up due to a sharp spike in commodity prices, particularly for oil and food items, forcing central banks to turn hawkish despite the uncertainty in global markets.
"Government bond yields are generally expected to rise further this year on the back of rising inflation rates and further expected hikes in policy interest rates for many markets in emerging East Asia," the ADB said in its quarterly Asia Bond Monitor report.
The development bank defines emerging East Asia as including China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam.
Despite the hawkish outlook for monetary policy in the region, foreign capital flows into local bond markets have been heavy because of attractive yields and expected appreciation of regional currencies versus the US dollar.
Foreign ownership stood at 30.5 percent in Indonesia, 20.3 percent in Malaysia, 9.9 percent in South Korea and 7.2 percent in Thailand at the end of December.
For Indonesian local currency bonds, it was another bumper year. Total returns were 24 percent in 2010 compared to 36 percent in 2009, the ADB said.
Outstanding Asian local currency bonds had grown at a pace of nearly 14 percent year-on-year in the fourth quarter of 2010 to $5.2 trillion.
The ADB said foreign currency bond issuance from the region was $87.2 billion in 2010, a nearly 40 percent increase from 2009's tally. Issuance activity remained robust in the early months of 2011, reaching $12.3 billion by mid-March.
It warned that risks to the market outlook in emerging East Asia include rapidly rising prices for food, oil and commodities, and the possibility that central banks will continue to raise their policy rates in 2011.
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