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Asian Bond Markets Hampered by Inflationary Concerns

Asian bond markets slid in April as rising inflation, US-dollar strength, and central bank tightening combined to unsettle the region’s investors.

SSGA Fixed Income Portfolio Strategists

May 18, 2022

Asian bond markets fell sharply in April, continuing their sell-off from the previous month. The Markit iBoxx ABF Pan-Asia Index returned -4.02% on an unhedged basis in United States dollar (USD) terms, while it was down by -1.48% on a USD hedged basis. The declines were driven by broad USD strength, risk-averse investors, and a sharp and sustained increase in inflation that led central banks across Emerging Asia to adopt less supportive financial policies.

Market	Local-Currency Return	Foreign-Exchange (FX) Return	Return (in USD)
Thailand	-3.81%	-2.73%	-6.43%
Malaysia	-3.09%	-3.40%	-6.38%
Korea	-2.16%	-3.50%	-5.58%
China	0.24%	-3.87%	-3.65%
Singapore	-0.91%	-2.02%	-2.91%
Hong Kong	-2.37%	-0.22%	-2.59%
Indonesia	-0.76%	-0.93%	-1.69%
Philippines	-0.61%	-0.89%	-1.49%

Energy-Driven Inflation in Thailand

Thailand was the region’s worst performer (-6.43%), with the local currency bond and foreign exchange (FX) elements under pressure. Despite year-on-year inflation slowing from 5.73% in March to 4.65% in April, investor concerns about rising energy imports and the relatively strong influence energy prices have on consumer inflation proved unhelpful for the market’s returns. In the near term, the Bank of Thailand is expected to hold interest rates at 0.5%, although it will likely come under pressured to raise borrowing costs if demand-driven inflation starts to rise.

Elevated Wage Costs in Malaysia

Malaysia (-6.38%) sold off as investors increasingly anticipate a 25 basis point (bps) interest-rate hike by Bank Negara Malaysia (BNM) at its May policy meeting. While headline consumer inflation remained essentially unchanged at 2.2% (year on year )in March, core inflation rose from 1.7% to 2%, its highest in over 31 months. Inflation is also being pushed higher due to rising wage costs, as the government proceeded with a 25% minimum wage hike on 1 May, despite calls for a more gradual implementation of the policy.

Rising Interest Rates in Korea

Korea (-5-58%) also experienced weakness, as mounting oil and food prices helped propel consumer inflation to 4.8% in April (from 4.1% in March), which is the highest level since Oct 2008. Meanwhile, core inflation for the month rose to 3.1%. At its April policy meeting, the Bank of Korea raised interest rates by 25 bps to 1.5% amid concerns about rising costs and wage pressures. Furthermore, market participants expect another rate hike in May.

Central Bank Caution in China

China (-3.65%) saw its FX element depreciate sharply, given mounting concerns about slowing growth as it continued to pursue its zero-COVID approach amid surging cases. From a policy perspective, the People’s Bank of China left interest rates unchanged and made a smaller than expected cut in the amount of money banks need to hold in reserve. China also saw further foreign capital outflows.

Singapore Adjusts its Currency Policy Band

Singapore (-2.91%) The Monetary Authority of Singapore (MAS) tightened monetary policy in April, by both changing the mid-point of the exchange rate policy band at the prevailing level of the S$NEER, and increasing slightly the rate of appreciation of the policy band. The MAS noted that external inflationary pressures have intensified and anticipates that supply-demand mismatches in commodities and transport bottlenecks will persist. Core inflation is now expected to come in at 2.5–3.5% this year, from the 2–3% predicted in January, while consumer inflation is forecast at 4.5–5.5%, from the earlier range of 2.5–3.5%.

Local-Currency Bonds in Hong Kong Weigh on Performance

Hong Kong (-2.59%) was negatively affected by the poor performance of the local currency bond segment. As Hong Kong imports its monetary policy due to a linked exchange rate with the US dollar, it will be forced to raise borrowing costs when the US Federal Reserve hikes interest rates. However, despite surging global commodity prices, inflation has remained benign due to a growth slowdown from the latest COVID wave and second-order effects from the outbreaks in China.

Inflation Remains Under Control in Indonesia

Indonesia (-1.69%) also sold off, but the decline was less pronounced than elsewhere. Bank Indonesia (BI) kept interest rates unchanged at 3.5%, emphasizing that inflation remains under control and poses no risk to economic stability. Furthermore, it stated that it will only respond if core inflation (still a moderately low 2.4%) starts to climb higher. Lastly, the central bank noted that it would continue to work closely with the government to keep inflation within the 2-4% target.

No Immediate Policy Action is Expected in the Philippines

In the Philippines (-1.49%), inflation increased, breaching the central bank’s 2-4% target, with pressure coming from the rising cost of food, fuel, and utilities. However, inflation in demand-driven categories, such as furnishing, recreation, and restaurants, remains low. Market participants believe that the central bank may look through inflationary pressures for another few months.

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