This file photo was taken on Sept 16, 2008 shows the logo of the Asian Development Bank (ADB) at its headquarters in Manila, capital of the Philippines. (PHOTO / XINHUA)

MANILA - Financial conditions in emerging East Asia weakened in the third quarter of 2023 amid expectations of higher interest rates for a longer period in the United States, according to a new report by the Asian Development Bank (ADB) released on Monday.

The latest edition of the Asia Bond Monitor said government bond yields rose across most regional markets in response to the elevated US interest rates.

Weak external demand and a moderating growth outlook in major economies, combined with the Fed's hawkish monetary stance, pushed down regional equity markets and drove up risk premiums

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Bond issuance in emerging East Asia grew 8.6 percent from the previous quarter to $2.5 trillion in the third quarter. Local currency bonds outstanding in the region increased 2.5 percent to $23.5 trillion. Government bonds expanded 3 percent amid increased issuance, and corporate bonds outstanding rose 1.5 percent.

The US Federal Reserve (Fed) recently signaled its intention to retain higher interest rates for extended periods, contributing to a weakening of financial conditions in emerging East Asia between Sept 1 and Nov 10, the ADB said.

Weak external demand and a moderating growth outlook in major economies, combined with the Fed's hawkish monetary stance, pushed down regional equity markets and drove up risk premiums. Capital outflows were recorded in the region's equity and bond markets. A stronger US dollar on the back of higher US interest rates also weighed on regional currencies, said ADB.

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"We see softer inflation in emerging East Asia in the next few years, which is a welcome development as regional central banks may have more room to support economic growth," said ADB Chief Economist Albert Park.

"At the same time, they should remain vigilant against financial turbulence in the face of interest rates remaining elevated for a longer period," Park added.