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Asian Bond Boosted by Reopening and Inflationary Newsflow

Asian Bonds Recover in November as Investors React Positively to Easing US Consumer Inflation, Dollar Weakness, and China’s COVID Reopening.

SSGA Fixed Income Portfolio Strategists

Asian bond markets enjoyed a sharp rally in November 2022, with the Markit iBoxx ABF Pan-Asia Index rising by +5.42% on an unhedged basis in United States dollar (USD) terms and +1.74% on a USD hedged basis. A surprise decrease in core US consumer inflation led to a rally in US Treasury yields, and the US dollar index (DXY) retreated from its highs. A faster-than-anticipated relaxation of COVID measures in China and increased flows into emerging markets (EM) provided additional support.

Market Local Currency Bond Return FX Return Return (in USD)
Korea 3.37% 8.01% 11.65%
Thailand 3.01% 7.67% 10.91%
Malaysia 2.09% 5.83% 8.04%
Singapore 2.26% 3.07% 5.40%
Philippines 1.01% 2.46% 3.49%
Indonesia 3.37% -0.85% 2.49%
Hong Kong 1.30% 0.60% 1.90%
China -1.06% 2.12% 1.03%

Encouraging Economic Backdrop Boosts Korean Bonds

Korea (+11.65%) saw a reversal of the underperformance seen in recent months on the back of improved global economic sentiment. Even if the ongoing rise in core inflation, led by a recovery in consumption, means the Bank of Korea has to continue hiking interest rates until it reaches a peak of close to 3.75%, investors expect Korea’s trade deficit to dissipate next year amid the reopening in China and a recovery in tech exports.

Positive Sentiment but Challenges Remain

Thailand (+10.91%) also saw its local-currency bonds and the baht recover amid stronger risk sentiment. Even as Thailand's real GDP expanded by 4.5% year on year in the third quarter of 2022, it remains below pre-COVID levels, with most of the increase coming from foreign tourism improving from a low base level. Thailand does remain vulnerable to the global economic slowdown, given its large share of trade in goods and services. Despite core inflation remaining around 3.2% year on year, the Bank of Thailand signaled its intention to tighten monetary policy with measured and gradual rate hikes, given the weak recovery. At its November policy meeting, the central bank raised interest rates from 1% to 1.25%.

Healthier-Than-Anticipated Growth in Malaysia

Malaysia (+8.04%) delivered a solid performance on the back of a stronger-than-expected third-quarter GDP reading of 14.2% year on year. This was aided by healthier investment growth, stable private consumption, a higher goods surplus, and smaller services deficit. Bank Negara Malaysia (BNM) now expects full-year growth to exceed the 6.5-7% range forecast by the finance ministry in its October budget. Market participants anticipate another 25-basis point interest-rate increase in January, followed by a likely pause to assess the effect of five continuous hikes on the economy. BNM should resume in the latter part of 2023 if economic growth remains robust.

Price Rises Ease in Singapore

Singapore (+5.4%) rose on the back of a decrease in both headline inflation (6.7% versus 7.5% previously) and core inflation (5.1% versus 5.3% previously). This led to expectations that the Monetary Authority of Singapore (MAS) would ease its aggressive moves on the foreign-exchange-oriented monetary policy front. The MAS growth forecasts for 2023 are within a range of 0.5-2.5%, and the body has ruled out a recession as its base case scenario. It also forecast that growth in 2022 would touch 3.5%.

Currency Recovery Continues

In the Philippines (+3.49%), the peso rose again in November after weakening by almost -13.7% in the first nine months of 2022. Downside risks remain, though, as headline and core consumer inflation accelerated to 8% and 6.5% year on year in November – the highest since 2008. The Bangko Sentral ng Pilipinas (BSP) outlook remained hawkish, and market participants anticipate a 50-basis point rate hike in December, with further increases next year if inflation continues to rise. Third-quarter GDP growth was robust, coming in at 7.6% year on year and 2.9% quarter on quarter, amid a recovering domestic sector.

Local-Currency Bonds Outweigh Rupiah Weakness

Indonesia (+2.49%). Despite the recent rally in Asian currencies, the Indonesian rupiah has been a notable exception, weakening by -0.9%. More positively, Indonesia’s local-currency bonds staged a bounce back. After assuming a dovish policy stance for much of the year, Bank Indonesia (BI) started hiking rates in August to maintain positive interest-rate differentials and attractive rupiah yields. However, the central bank’s moves have had a limited effect on containing debt outflows and rupiah weakness. BI left its growth forecasts unchanged at the upper end of 4.5-5.3% and marked down the end-2022 inflation forecasts, expecting headline inflation to move from 6.3% to 5.6% and core from 4.3% to 3.5%.

Potential Fed Pivot Boosts the Hong Kong Market

Hong Kong (+1.9%) bonds and the Hong Kong dollar saw a small positive return in November as US Federal Reserve (Fed) rate-hike expectations eased. The Hong Kong Monetary Authority has raised interest rates by six times this year, mirroring the Fed's increases. The Hong Kong dollar had traded at the weak end of its convertibility zone of 7.75-7.85 for most of the year before strengthening in November.

Reopening in China Helps Improve the Market Tone

China (+1.03%) saw the renminbi make gains in November, ending eight straight months of declines, as USD weakness and reopening newsflow provided support. However, trade and high-frequency data, such as automobiles and home sales, remained soft. Given this weakness in activity and a disappointingly low credit expansion, the People’s Bank of China cut the amount banks must hold in reserve by 25 basis points in November, as it aims to reduce financing costs in the real economy.

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