Insights

Asian Bond Markets Subdued by US Dollar Strength

Despite easing inflationary pressures and supportive policy moves in China, US dollar strength resulted in negative returns across most Asian bond markets.

July 14, 2023

SSGA Fixed Income Portfolio Strategists

In June 2023, the Markit iBoxx ABF Pan-Asia Index returned -0.81% on an unhedged basis in US dollar terms and +0.04% on a US dollar hedged basis. A strengthening US dollar remained a headwind for Asian local-currency bonds. However, local-currency bond yields diverged substantially across individual markets as inflation declined by more than expected in most Asian economies.

Monetary policy divergence between the United States and China became more pronounced during the month. While the US Federal Reserve (Fed) signaled fresh interest rate hikes, the People’s Bank of China (PBOC) announced a series of broad-based interest-rate reductions. Markets also expect a further cut to the reserve requirement ratio, or the amount of money banks must hold in reserve in order to stimulate credit growth.

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Indonesia	1.02%	0.04%	1.05%
Korea	-0.49%	0.73%	0.24%
Philippines	-1.48%	1.68%	0.18%
Hong Kong	-0.49%	-0.03%	-0.52%
Singapore	-0.71%	-0.09%	-0.80%
Malaysia	0.00%	-1.18%	-1.18%
China	0.49%	-2.09%	-1.61%
Thailand	-0.14%	-2.34%	-2.48%

Indonesian Bonds Rally as Inflation Reaches the Central Bank’s Range

Indonesia (+1.05%) was the best-performing market in June 2023, as its local-currency bonds rallied further. Bond yields declined to their lowest levels in more than a year, while the Indonesian rupiah remained stable as the interest rate differential remained favorable compared to most Asian peers. Consumer price inflation declined by more than expected, reaching Bank Indonesia’s (BI) target range which was supportive for local-currency bonds. BI kept interest rates unchanged for the fifth-consecutive monthly meeting, and market participants expect a prolonged pause in the interest-rate cycle.

A Narrower Trade Deficit Boosts the Korean Market

South Korea (0.24%) delivered a small positive return, with an appreciating Korean won offsetting a decline in local-currency bond returns. Korean bond yields rose in June 2023, despite consumer inflation declining slightly more than expected. A narrower-than-anticipated trade deficit for May supported the Korean won in the first half of the month.

Philippine Peso Strength Provides Support

Philippines (0.18%) saw positive returns in USD terms driven by a stronger Philippine peso. That said, Philippine-peso-denominated returns were significantly negative. Although headline inflation readings declined in line with expectations, the Bangko Sentral ng Pilipinas (BSP) said that the balance of risks to the inflationary outlook was tilted to the upside for this year and next. This led to a sell-off in local-currency bonds, although higher yields were positive for the peso. Meanwhile, in a move to deepen the local-currency bond market, the BSP announced plans to introduce a local-currency yield curve by next year and the launch of an overnight market-reference rate as an alternative to the London Interbank Offered Rate (LIBOR) in July 2023.

Softer Local-Currency Bond Returns in Hong Kong

Hong Kong (-0.52%) delivered modestly negative returns. This was chiefly due to a decline in its local-currency bonds. Bond yields rose in line with global markets, while economic data remained mixed: lower-than-expected consumer inflation and weaker trade data but better-than-anticipated retail sales. Aligned with the Fed, the Hong Kong Monetary Authority kept interest rates unchanged at 5.5% while cautioning that the higher interest rate environment may persist for some time.

A Mixed Economic Picture Emerges in Singapore

In line with the global trend, local-currency bond yields rose in Singapore (-0.8%), while the Singapore dollar remained unchanged, leading to negative USD-denominated returns. Yields increased across the curve despite a larger-than-expected decline in headline consumer price inflation. Economic data in Singapore remained mixed. While retail sales data showed positive annual growth compared to expectations of a decline, industrial production was weaker. Also, a fall in quarterly property prices indicated slowing momentum. However, the Monetary Authority of Singapore said it was not contemplating a shift in monetary policy from an inflation-fighting to a growth-supporting mode just yet.

Ringgit Weakness Hampers Malaysia

Local-currency bond yields in Malaysia (-1.18%) saw only a modest increase resulting in nearly unchanged returns in local-currency terms. However, a depreciation in the Malaysian ringgit resulted in negative USD-denominated returns. Economic data releases such as industrial production and Purchasing Manager Index (PMI) reports indicated a larger-than-expected slowdown, while consumer inflation declined by more than expected. Consequently, local-currency bond yields were better supported, although the currency impact was negative. At its recent policy meeting, Bank Negara Malaysia (BNM) kept interest rates on hold (as expected), with growth in the second half of the year likely to be driven primarily by domestic factors.

Policy Action in China to Support the Economic Recovery

China’s (-1.61%) local-currency bond markets delivered positive returns, although further weakness in the Chinese yuan resulted in negative USD-denominated returns overall. Key economic data, including PMIs, exports, and retail sales, were below expectations. Notably, the PBOC reduced the seven-day reverse repo rate (the rate the PBOC pays to China’s commercial banks to park their excess funds) by 10 basis points to 1.9%. At the same time, cuts were also announced in medium-term lending facility (MLF) loan rates and benchmark-lending loan prime rates (LPR), which are used as a reference point when setting mortgage and loan rates. These measures supported a decline in bond yields and led to further weakness in the Chinese yuan, especially as the yield gap widened further compared to the United States. However, market participants anticipate additional cuts to bank reserve requirement ratios (RRR) to further incentivize credit growth and support the economic recovery.

A Declining Baht Hampers Thai Returns

Thailand’s (-2.48%) local-currency bonds saw a modest decline. However, the Thai baht weakened significantly against the US dollar. Consumer inflation fell substantially, moving below the central bank’s 1% - 3% target. However, a larger-than-expected trade deficit and negative current account balances put downward pressure on the baht. Market participants expect a modest interest-rate hike from the Bank of Thailand at its August 2023 meeting, as the central bank faces a balancing act between supporting the baht and managing high levels of household debt.

Footnotes

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