East Asian bond markets, which are outperforming developed nations, face the risk of a capital exit should an event such as the US fiscal deficit trigger a recession, according to the Asian Development Bank.

Regional policymakers need to increase efforts to shield their economies from another crisis even after doubling the pool of combined foreign-currency reserves to US$240 billion as of May, said Iwan Azis, head of the ADB's economic integration office. The US budget issue threatens a recovery and an agreement in Congress that doesn't address the long-run sustainability of the deficit may not be welcomed, the Manila-based lender said in the Asian Bond Monitor report yesterday.

A volatile debt market and swings in yields may deter both bond issuers and international investors, who raised holdings of fixed-income securities in the region last quarter, Azis said. Asian local-currency notes have returned 8.2 percent this year, compared with 2.1 percent in the US and 7.1 percent among European countries, according to indexes compiled by HSBC Holdings Plc and Bank of America Merrill Lynch.

"Capital flows continue to grow in Asia but at the same time they are getting more and more volatile," Azis said. "The bond market is now the most important source of financing for many Asian countries."

Overseas holdings of local-currency debt in some East Asia markets, which the ADB terms as China, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam, rose last quarter, the multilateral lender's bond report showed.