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Asian Bond Markets Buoyed by Ongoing Policy Support

Bond markets in Asia enjoyed a positive end to the year, as investors were reassured by the prospect of continued policy support from the region’s central banks.

SSGA Fixed Income Portfolio Strategists


Overall, Asian bond markets saw positive returns in December 2021, with the Markit iBoxx ABF Pan-Asia Index rising by +0.54% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the index was only marginally higher (+0.03%) on a USD hedged basis. With some exceptions, such as the Bank of Korea, most central banks in emerging Asia have assured they will remain supportive for longer to sustain the economic recovery. Growth concerns from a renewed surge in COVID cases and a still favorable inflationary outlook for emerging Asia, compared to other territories, mean that the region’s policymakers are in no rush to follow the US Federal Reserve’s more assertive lead.

Market Local-Currency Return Foreign-Exchange (FX)  Return Return (in USD)
Malaysia 0.33% 1.16% 1.49%
Singapore -0.20% 1.37% 1.16%
Thailand -0.15% 1.02% 0.87%
China 0.67% -0.05% 0.61%
Indonesia 0.06% 0.49% 0.56%
Hong Kong 0.15% 0.05% 0.20%
Korea -0.37% -0.07% -0.44%
Philippines 0.54% -1.19% -0.66%

Encouraging growth but inflation ticks higher

Malaysia was up by +1.49%, with most of the return coming from the foreign exchange (FX) element. November’s losses were reversed on the back of stronger industrial production and growth data. Year-on-year headline consumer inflation jumped from 2.9% in October to 3.3% in November, exceeding the upper limit of Bank Negara Malaysia's (BNM) 2-3% forecast range. The increase was mainly driven by the base effects of last year’s fuel-price reductions. While core inflation also rose, the gain was a relatively smaller 0.9% year on year in November (from 0.7% in October). Market participants expect BNM to leave interest rates unchanged at 1.75% throughout the first quarter of 2022.

Social and economic activity increase in Singapore

Singapore bonds gained +1.16% in USD terms, with FX the primary driver. Fourth-quarter gross domestic product (GDP) growth rose by 2.6% compared to the previous quarter, as social-distancing measures were relaxed. This exceeded market expectations, and 2022 growth forecasts were subsequently raised. Around 40% of the population has received a COVID vaccine booster shot, which should reduce the probability of renewed restrictions and the healthcare system being overwhelmed even if cases increase. The Monetary Authority of Singapore’s decision in October to let the Singapore dollar appreciate slightly allows it to wait and see what the Fed does next and observe how the inflationary backdrop develops before making further policy changes in 2022.

Currency improvements but tourism remains on the back foot

Thailand did well last month (+0.87%), as the baht bounced back, offsetting November’s weakness. Consumer inflation decreased from 2.71% in November to 2.17% year on year in December, and inflation averaged 1.2% in 2021 – this was in line with the Bank of Thailand's forecast. The arrival of the new virus variant dampened hopes of an accelerated recovery in tourism and travel volumes. As such, investors expect the Bank of Thailand to leave the interest rate unchanged at 0.5% until the end of 2022 at least, with a clear preference for supporting growth.

Improvements in manufacturing and bank lending

China also had a good month (+0.61%), with the local-bond component contributing most. Manufacturing data improved in December, with steady growth throughout most of the fourth quarter of 2021. The People’s Bank of China cut the amount of money banks must keep in reserve by 0.5 percentage points, which took effect on 15 December. The move was designed to free-up cash for borrowers and support growth. Market participants predict that China’s GDP growth in 2022 will be 5.2%, but much depends on the path of the Omicron variant – China’s commitment to its zero-COVID policy could have a significant impact on the services and consumer sectors should there be new COVID outbreaks in the first quarter of 2022.

Higher inflation and growth trigger interest-rate concerns

Indonesia returned +0.56%, chiefly from FX appreciation. Headline consumer inflation was more substantial than expected in December, rising to 1.87% year on year from 1.75% in November, bringing it close to Bank Indonesia's 2-4% target range. Investors fear that stronger domestic growth (the GDP growth expectation for 2022 is now at 5.2%), inflation, and a more aggressive Fed, could pressure BI into an early interest-rate rise to defend the rupiah.

Omicron casts a shadow on cross-border travel

Hong Kong was up by 0.2%, with most of the increase coming from the local-bond segment, as FX remained flat. The emergence of the Omicron variant has depressed the near-term outlook for leisure and business travel, as well as Hong Kong’s retail sector. A delay in reopening Hong Kong’s border with China and disruption to consumption during the Lunar New Year period pose significant risks to first-quarter GDP growth forecasts.

Interest-rate hike to combat rising inflation

Korea saw a sell-off in its local bonds after the Bank of Korea hiked interest rates by 0.25% at its November meeting, with a clear majority of the monetary-policy committee supporting the continued ‘normalization’ of economic policy. This stance was underpinned by expectations of a healthy recovery and higher inflation over the longer term. Indeed, headline inflation in December remained elevated at 3.7%, which brought the average headline inflation number for 2021 to 2.5%. Core inflation surged to 2.7% in December (from 2.4% in November) and averaged 1.8% for the full year.

Growth expectations improve, but COVID remains a worry

Philippines declined by -0.66%, as local-bond strength wasn’t enough to overcome significant FX weakness. At its December policy meeting, the Bangko Sentral ng Pilipinas (BSP) kept the overnight borrowing rate unchanged at 2% but raised its 2021 and 2022 inflation forecasts to 4.4% and 3.3%, respectively. Meanwhile, it maintained the 2023 inflation forecast at 3.2%. The Development Budget Coordination Committee increased the Philippines' 2021 GDP growth forecast range to 5-5.5% (previously 4-5%) and retained its 7-9% growth forecast for 2022. However, while vaccination rates have improved, it still lags other parts of the region, meaning that growth uncertainties associated with the Omicron variant remain high.