Emerging East Asia’s financial markets have improved, with bond yields dropping due to moderating inflation and anticipated additional interest rate cuts, according to the latest report by the Asian Development Bank (ADB).

The recently released Asia Bond Monitor report, highlights that East Asia’s markets began to rebound in July, following signals from the United States Federal Reserve about a potential rate cut in September. This optimism led to currency appreciation against the US dollar and reduced risk premiums across the region. Equity markets also rallied, with the notable exceptions of the People’s Republic of China (PRC) and Hong Kong, China, where weak economic performance curbed growth. Overall, Emerging East Asia saw $7.6 billion in equity inflows during the review period.

“Policy rate cuts are forthcoming in both advanced and regional markets, which will strengthen financial conditions in Emerging East Asia,” said ADB Chief Economist Albert Park. “However, risks like weaker-than-expected economic performance in the PRC and geopolitical tensions remain. Overall, the financial outlook for the region is balanced.”

Emerging East Asia, which includes ASEAN economies, the PRC, Hong Kong, and the Republic of Korea, saw its local currency bond market expand by 2.3% in the second quarter of 2024, reaching $25.1 trillion by the end of June. Government bonds led the way with a 2.8% quarterly increase, driven by the PRC’s increased issuance of treasury bonds to support its economic activities. The PRC also fueled the 1.5% expansion of the corporate bond market as banks ramped up debt issuance to meet regulatory requirements.

Sustainable bonds in the ASEAN+3 economies—comprising ASEAN countries, the PRC, Japan, and the Republic of Korea—totaled $868.1 billion by the end of June, showing an annual growth rate of 17.4%, outpacing both European and global markets. In the second quarter of 2024, ASEAN+3 sustainable bond issuance saw longer maturities, with the average tenor increasing to 6.9 years, largely driven by public sector contributions.

Despite the positive outlook, challenges remain, particularly in the PRC’s economic performance and global geopolitical tensions. Nonetheless, the region’s financial conditions are set to benefit from the continued expected policy rate cuts and improving inflation trends.