The publication reviews recent developments in East Asian local currency bond markets along with the outlook, risks, and policy options. This issue includes a special section on Sukuk (Islamic bonds) Developments in Emerging East Asia.

Emerging East Asia’s bond markets have seen rising yields as investors shift away from emerging markets. Weaker growth and depreciating currencies have combined to make emerging market bonds less attractive to investors. Bond yields in advanced economies have remained broadly stable, with inflationary pressures muted amid hesitant economic recoveries. Falling oil prices have further dampened inflationary pressures.

The brighter economic outlook in the United States (US) suggests that the Federal Reserve could be poised to raise interest rates as early as September. However, recent weakness in developing economies and declining oil prices may make the Federal Reserve more cautious in raising interest rates.

The size of emerging East Asia’s local currency bond market rose to $8.625 trillion by the end of June, with growth accelerating on both a quarter-on-quarter and year-on-year basis in 2Q15 compared with the previous quarter. Five out of the nine emerging East Asian markets recorded faster quarter-on-quarter growth in 2Q15—the People's Republic of China (PRC), the Republic of Korea, Malaysia, Singapore, and Thailand—while all markets in the region exhibited positive year-on-year growth.

The PRC was the largest local currency bond market in emerging East Asia at the end of June with outstanding bonds worth $5.590 trillion, followed by the Republic of Korea at $1.756 trillion. The third largest bond market in the region was Malaysia at $285 billion, more than half of which comprised sukuk (Islamic bonds), making it the largest sukuk market in the region.