Find Out How the PAIF Asian Bond Markets Evolved

The growth of Asian economies and their bond markets has been diverse but relatively resilient. Over the past 20 years, for example, income per capita has risen more than three times across the ASEAN bloc. In Vietnam alone, incomes are eleven times higher than in 2000.¹ A recent report from the International Monetary Fund observes that the region has a demographic advantage relative to other economies, with more working-age people than dependents.² Certain markets, like Singapore, are economically advanced and well-diversified. In contrast, others strive to improve education levels and move towards a more service-oriented and higher-skill framework, boosting productivity.³ This process should be sustained as economic and regulatory reforms continue.

Asian Central Banks Have Become Less Susceptible to Interference

Since the 1990s, central banks across Asia have strengthened their policy structures, achieving clearer mandates and more independence from political pressure. The use of inflation targeting has expanded rapidly, meaning that inflation expectations are more firmly anchored and managed, raising interest rates when required to help dampen inflation. While this may prove unpopular in the short term, as it generally raises costs for those with debt, it increases confidence in the abilities and independence of the central bank over a longer time frame. In turn, this attracts more investors, resulting in higher bond issuance.

Asian Local-Currency Bond Market Volatility is Better Managed

A further beneficial development is a decline in destabilising currency devaluations. Sharp devaluations can trigger a chain reaction whereby investors sell their assets, increasing the pressure on the currency. Investors with confidence in the power and independence of central banks will feel more secure that rapid devaluations will either not occur or be gradually permitted and managed.

Currency Appreciation is Also a Challenge

Recently, some Asian currencies have performed strongly against the US dollar amid concerns triggered by tariff uncertainty. However, an overly strong currency is not automatically desirable for an economy because it increases the prices of its exports to other markets, dampening demand. That said, the current weakness or risk premium built into the US dollar could dissipate if trade policy uncertainty diminishes . Delays in orders being sent to the US from Asia have sharply declined owing to tariffs, and this has also slowed the normal receipt of US dollars, which would then have been sold for respective local currencies.⁵

Diverted Shipments Boost Intra-Regional Trade – But at a Potential Cost

Some intra-regional trade may, in fact, be shipments that were intended for the US diverted to third markets, like Vietnam, to avoid punitive tariffs. However, a downside to a market accepting this type of shipment is that it may compete with products from their domestic economy and create a large trade deficit with the US, potentially leading to the US reimposing or increasing tariffs.⁶

Greater Issuance of Longer-Term Bonds Helps Markets Develop

The tenor (or length of time) until a bond matures has also generally risen in the region. Across Asia, the size-weighted average tenor of local-currency government bonds issued in 2024 was 9.2 years, and 54.1% of bonds on issue had a maturity greater than 5 years.⁷ This helps bond markets develop because investors are offered various maturities, allowing them to match their expected liabilities better. Longer-term bonds are more sensitive to interest-rate changes and enable investors to lock in a known interest rate at a future date. This is particularly important for pension funds and other institutions with longer-term liabilities.

Who Are the Predominant Investors in Local-Currency Bonds?

Local-currency bond investors vary considerably across the region. Banks and pension funds dominate in some markets, like China and Indonesia. In others, such as Vietnam and Thailand, insurance and pension funds are the main holders. Central banks and foreign holders also own bonds in most markets.⁸ Generally, having a broad range of investor types is beneficial, as this lowers market concentration and reduces dependence on one type of investor.

Foreign Exchange Swaps Are Now More Widely Available

The growth in the use of tools such as currency forwards and swaps to help manage exposures to interest rates and currencies has also assisted in the region's development. A swap arrangement between markets helps improve short-term liquidity support in currency markets, reducing pressure on currency funding markets and facilitating trade and investments.⁹

Sustainable Bonds Are Becoming More Attractive

The sustainable bond markets of the ASEAN +3 bloc (the +3 being China, South Korea and Japan) issued the equivalent of US$237 billion in 2024. Of this amount, 75% was in local currency.¹⁰ The ASEAN+3 sustainable bond market is now nearly as large as that of the EU-20, with a global share at the end of 2024 of 25.5% compared to the EU-20’s 30.4%. The predominant issuers of sustainable bonds are private, at 65.1% of issuance.¹¹

The Region’s Prospects Remain Bright

Ultimately, if policy settings across legal, regulatory, and government frameworks continue to show improvement, Asian local-currency bond markets could be expected to grow, broaden, and diversify across new types of issuers and investors.