Efforts to make the global financial system safer could be making Asia more - not less - vulnerable to any credit market shocks, leaving bond traders worried that a sharp sell-off since late May could turn into a rout.
Low global interest rates have made it easier than ever to sell new bonds denominated in dollars, euros or yen, resulting in a boom in issuance that has made Asia and its companies ever more dependent on debt.
(Read More: Asia's Next Big Risk Is Rising Rates: World Bank)
But the market for trading those bonds is slowly drying up, leaving it susceptible to a sharper sell-off if holders of these so-called G3 bonds decide it is time to head for the exit.
"The issue is that if any of them choose to sell their holdings, the market may not have the capacity to absorb these flows. If we reach a stage like that then liquidity could dry up very quickly and that can have a spiraling effect," said Dhimant Shah, a fund manager at Mackenzie Investments in Singapore.
Bond markets in Asia have generally trended higher since the Lehman crisis during the global financial crisis in 2008, partly aided by the flood of cash from Western central banks aimed at reviving their economies. By one measure, a JP Morgan basket of credit, the debt market hit its highest level in May since the global financial crisis.
In the last month though, bonds have stumbled on jitters over when the U.S. Federal Reserve will start to unwind its stimulus program. Yields, which move inversely to prices, on the debt tracked by the JP Morgan basket have jumped in the past month more than 60 basis points, largely in the past two weeks. The yield on Indonesian government bonds due in 2020 have risen even faster, nearly 100 basis points in the past month.
(Read More: Markets May Be Overpricing Risk of Fed Tapering)