Asia Bonds Post Positive Returns While China Kickstarts a Special Sovereign Bond Issuance Program

In May 2024, Asian bonds posted positive returns as yields declined across most markets, while Asian currencies consolidated following the previous month’s sharp declines. The Markit iBoxx ABF Pan-Asia Index returned +1.04% on an unhedged basis, with a positive return from income (coupons) as well as price appreciation. With Asian currencies nearly unchanged, the US-dollar-hedged return was 0.98% for the month.

Across Asian markets, 10-year bond yields fell by an average of 10 basis points in May 2024. This contrasted with an increase in yields seen in Japan and Europe but was lower than the yield decline in the United States. On aggregate, economic data was below expectations in China as well as the United States. Consequently, market projections for the US federal funds rate throughout 2024 remained unchanged in May, i.e., two rate cuts expected by the end of December 2024. This provided room for Asian currencies to consolidate.

In Asian fixed income, Indonesian yields declined the most in the month (down 31 basis points), followed by the Philippines (down 19 basis points). In contrast, China bond yields remained decoupled from the rest of Asia and global economies, ending May 2024 largely unchanged and trading near multi-decade lows. In a notable development, China’s Ministry of Finance issued the first tranches of a one trillion yuan ultra-long special sovereign bond issuance program to fund its fiscal stimulus program, with the initial tranche garnering strong investor interest.

Unexpectedly Robust Growth and Rates on Hold

Malaysia (+2.3%) was the best-performing market in the Index, delivering +2.3% in US-dollar terms. Also, the Malaysian ringgit was the strongest Asian currency in the month (despite a weaker trade balance). Malaysian-ringgit returns were also positive (+0.9%), as long-term yields declined by eight basis points. Economic data releases remained mixed, on aggregate, with improving manufacturing activity, as indicated by the Purchasing Managers' Index (PMI) survey, and better-than-expected gross domestic product (GDP) growth. Meanwhile, consumer inflation remained largely unchanged. At its policy meeting, Bank Negara Malaysia kept its overnight policy rate steady at 3%, and market participants do not expect significant changes in the policy rate during the second half of 2024. Notably, central bank measures incentivizing state-linked firms to repatriate the Malaysian ringgit have provided stability to the currency amid a higher-for-longer US Federal Reserve monetary-policy path.

Singapore Dollar Strength

Singapore (+1.7%) saw a positive return in US-dollar terms, supported by a robust Singapore-dollar return of +0.7%. Meanwhile, 10-year yields fell by nine basis points in May 2024, leading to positive returns from income and price appreciation (+1% in Singapore-dollar terms). Economic data releases indicated a slowing economy with a larger-than-expected fall in retail sales, exports and industrial production, supporting the decline in bond yields.

Sharp Decline in Indonesia’s Long-Term Bond Yield

Indonesia (+1.7%) was one of the best-performing Asian markets in local currency terms (+1.5%) as 10-year yields declined significantly by 31 basis points. Meanwhile, the Indonesian rupiah saw a modest appreciation. Key data releases revealed a softer economic picture, with weakness in the manufacturing PMI survey and auto sales, as well as a deteriorating current account and trade balance. On the other hand, consumer confidence showed signs of improvement. Consumer inflation data was lower than expected, and Bank Indonesia kept the policy rate (6.25%) unchanged at its May 2024 policy meeting, which was in line with market expectations. Market consensus expects that the interest-rate-cutting cycle will commence in the fourth quarter of 2024, aligning with the US Federal Reserve cycle.

Softer Consumer Inflation in Hong Kong

Hong Kong (+0.8%) saw the 10-year yield decline by 14 basis points in May 2024, leading to positive Hong Kong dollar and unhedged US-dollar returns of 0.8%. Economic data releases, including the manufacturing PMI and retail sales, showed weaker economic momentum, although the trade balance was better than expected. Notably, the consumer inflation increase was surprisingly moderate (+1.1% versus an expected +2%). The Hong Kong Monetary Authority (HKMA) kept interest rates unchanged, in line with US Federal Reserve policy, guiding that the inter-bank rate may stay ‘higher’ for some time. In other notable developments, the HKMA, in collaboration with the People’s Bank of China (PBOC), launched the e-CNY (or the digital yuan) for Hong Kong residents to facilitate cross-boundary payments and trade settlements.

Thailand Bucks the Trend with a Rise in Bond Yields

Thailand (+0.8%) bonds experienced little change when measured in Thai-baht terms. However, US-dollar returns remained positive, driven by a 0.8% appreciation in the Thai baht. Contrary to the trend across Asian economies, bond yields increased as consumer inflation data was stronger than anticipated. At the same time, other economic data releases, such as GDP growth and manufacturing production, also indicated better-than-expected economic momentum. Notably, the manufacturing production data showed an improvement in activity for the first time since the third quarter of 2022.

Bank of Korea Points to Higher Inflation and Stronger Growth

South Korea (+0.6%) recorded positive Korean-won returns, driven by a modest eight basis point fall in the 10-year yield. However, a marginal decline was seen in the Korean won. Economic data releases showed a mixed picture, with better-than-expected trade balance and industrial production data but marginally weaker consumer inflation. At its policy meeting in May 2024, the Bank of Korea (BOK) maintained its base rate at 3.5%, as widely expected, but the overall tone was more hawkish, citing the potential for a rise in consumer inflation. The BOK also noted a weaker outlook for domestic consumption, with economic growth mainly driven by better external demand and net exports. The market expects South Korea’s rate-cutting cycle to begin in the second half of 2024.

Weaker Than Expected Economic Newsflow in China

China (+0.4%) posted marginally positive returns in Chinese-yuan terms (+0.4%) while the Chinese yuan remained nearly unchanged. Ten-year bond yields consolidated, trading near multi-decade lows as market participants assessed the impact of incremental stimulus measures on weaker economic growth. Economic data releases, such as the services PMI, China’s trade balance, retail sales, and fixed asset investment, were, on aggregate, weaker than predicted. At its May policy meeting, the PBOC kept the one-year and five-year loan prime rates unchanged, as expected. In other notable developments, the Ministry of Finance launched a one trillion yuan ultra-long special sovereign bond program with a tenor of 20 to 50 years. The first tranche witnessed strong demand with a bid-to-cover ratio of 3.91. The PBOC also announced a 300 billion yuan provision for financial institutions, allowing them to lend to state-owned enterprises to buy unsold real-estate inventory.

Philippine Peso Slide Dents Market Returns

Philippines (+0.4%) recorded strong Philippine peso returns (+1.9%) as the 10-year yield declined by nearly 19 basis points in May 2024. However, a 1.5% depreciation in the Philippine peso led to a 0.4% return in US-dollar-denominated terms. While the manufacturing PMI survey rose, GDP growth and trade data were weaker than expected. Consumer inflation data was also softer than predicted. Bangko Sentral ng Pilipinas signaled a dovish policy tone, lowering its risk-adjusted inflation forecast and leaving the door open for a rate cut in August.