Local currency (LCY) government bond yields in advanced economies and emerging East Asia diverged between 31 December and 15 February. Yields in advanced economies rose while yields fell in most emerging East Asian bond markets due to heterogeneous economic fundamentals and changes in risk appetite. Emerging East Asia has shown signs of improving economic growth and rising inflation and a decline in LCY government bond yields was seen in most markets given improving investor confidence. The improved outlook could also strengthen emerging East Asia’s financial markets against the possible reversal of capital flows in response to the Federal Reserve’s expected monetary policy normalization. This issue of the Asia Bond Monitor includes three special discussion boxes. Box 1 discusses the risk of Federal Reserve rate hikes to emerging Asia’s financial stability. Box 2 analyzes the risks to emerging Asia’s financial markets stemming from policy and political uncertainties in the US and the eurozone. Box 3 tackles the impacts of the depreciation of the Chinese yuan.