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Asian Bond Yields Diverge as China Yields Slide

Asian bonds declined, and yields rose by an average of 10 basis points in January 2024. Conversely, China government bond yields slid on soft economic data.

5 min read

SSGA Fixed Income Portfolio Strategists

After recording strong gains in the fourth quarter of 2023, Asian bonds started the new year on a weaker note, with the Markit iBoxx ABF Pan-Asia Index returning -1.99% on an unhedged basis in US-dollar terms in January 2024.

Asian bond yields increased by an average of 10 basis points during the month, with US-dollar appreciation against Asian currencies the main contributor to the negative return of the unhedged index. However, the income component still offset the negative price impact, leading to positive returns on a hedged basis in US-dollar terms (+0.3%).

While Asian bond yields, on average, rose, a significant dispersion was seen in yield dynamics as 10-year yields in China declined to multi-decade lows on weak economic data, particularly as deflationary pressures remained intact. In contrast, January 2024 saw bond yields in Hong Kong and Singapore increase by more than 20 basis points. Indeed, Singapore bond yields remained near the ninetieth percentile of their historical range.

On aggregate, US consumer inflation data and economic releases were surprisingly robust. Consequently, market participants lowered their expectations for Fed fund futures rate cuts in the first half of 2024, with the implied rate based on the Fed fund futures rate moving from 4.54% to 4.71% by the US Federal Reserve’s (Fed) June 2024 meeting, thereby, supporting the US dollar’s appreciation against Asian currencies.

Market Local Currency Bond Return FX Return Total Return (in USD)
China 0.9% -1.2% -0.3%
Hong Kong -0.4% -0.1% -0.4%
Indonesia 0.5% -2.4% -2.0%
Singapore -0.4% -1.6% -2.0%
Philippines -0.5% -1.6% -2.1%
Malaysia 0.5% -3.0% -2.5%
Thailand 0.9% -3.8% -2.9%
Korea -1.2% -3.5% -4.7%

Weak Economic Data Weighs on China Bond Yields

China (-0.3%) was the best-performing market in January 2024 in Chinese yuan and US dollar-denominated terms. Long-term bond yields declined by 13 basis points during the month to the lowest level in multiple decades as aggregate economic data releases were, again, surprisingly weak. Deflationary pressures remained intact, and manufacturing surveys, retail sales and credit growth were softer than expected. New home prices and property sales by area also saw sharp declines. In response, the People’s Bank of China announced additional stimulus measures, including a reduction in the reserve ratio requirement (the amount banks must keep in reserve) by 50 basis points, thus leading to a liquidity infusion of nearly 1 trillion yuan (US$139.8 billion). Market consensus expects a further reduction in medium-term lending facility rates and the reserve ratio requirement in 2024.

Improving Economic Newsflow in Hong Kong

Hong Kong (-0.4%) saw modestly negative returns in both Hong Kong dollar and US-dollar-denominated terms. Longer-term seven-year bond yields increased by 26 basis points as economic releases, such as Purchasing Managers' Index (PMI) surveys, improved. At the same time, retail sales and trade data were better than anticipated. However, consumer inflation moved marginally lower, continuing its downward trajectory since October 2023. The Hong Kong Monetary Authority kept its base rate unchanged, in line with Fed policy, to maintain the Hong Kong dollar-US dollar peg.

Better-than-expected Exports Balanced by Softer Inflation and Imports

Indonesia (-2.0%) recorded a positive 0.5% return in Indonesian rupiah terms, even as long-term yields rose by 12 basis points over the month on better income returns. PMI and auto sales data improved, while exports were better than expected. However, import data was weak, and consumer inflation marginally surprised to the downside. Anticipating that consumer inflation would remain in within its target range, Bank Indonesia kept interest rates unchanged at its January 2024 meeting while expecting a smaller current account surplus. Market consensus expects a prolonged pause in interest rates, which is also intended to support the Indonesian rupiah.

No Changes to Monetary Policy in Singapore

Singapore (-2.0%) delivered a negative return of -0.4% in Singapore dollar terms as long-term bond yields increased by 21 basis points. Economic data releases were mixed, with retail sales surprisingly strong. However, exports and industrial production were weaker than expected, while consumer inflation data was higher than predicted. At its policy meeting, the Monetary Authority of Singapore maintained the existing Singapore dollar nominal effective exchange rate policy band with no change to its width or center.

Rate cut expectations in Philippines supported by softer inflation and weak data

Philippines (-2.1%) posted a -0.5% return in Philippine peso terms, with the 10-year yield rising by nearly 13 basis points. Trade data was weak, while PMI surveys and consumer inflation indicated a downturn. Notably, consumer inflation data also declined to its lowest level since the first quarter of 2022, and market consensus expects the Bangko Sentral ng Pilipinas to cut interest rates by nearly 75 basis points in 2024.

Interest Rates on Hold in Malaysia

Malaysia (-2.5%) delivered a positive local currency return of 0.5%, with long-term yields rising by a modest six basis points in January 2024. Fourth quarter gross domestic product (GDP) growth data was weaker than predicted, while trade and industrial production numbers also surprised to the downside. The consumer inflation rate was in line with expectations, near its lowest level since the first quarter of 2021. Consequently, at its policy meeting, Bank Negara Malaysia (BNM) kept interest rates on hold as it believes growth will improve, supported by a strong labor market and improving tourist arrivals. Meanwhile, the inflation rate is expected to remain modest. Market consensus believes that BNM will maintain a prolonged pause in its policy rate.

Contrasting Policy Calls in Thailand

Thailand (-2.9%) saw a positive Thai baht return of 0.9% as PMI surveys revealed a larger economic downturn, while trade data remained weak. Inflation data also showed a decline in consumer prices. In contrast to the Prime Minister’s calls for a rate cut, the Bank of Thailand kept policy rates unchanged at its meeting in early February 2024. However, the central bank’s policy tone was dovish, with policymakers acknowledging that growth was slower than expected. Market consensus expects the Bank of Thailand to reduce interest rates by 25 basis points in 2024. The Thai baht also depreciated the most among Asian markets in January, as investors factored in lower interest rates following weaker economic data releases.

Rate cuts expected in South Korea in the second half of 2024

South Korea (-4.7%) was the weakest-performing Asian market in the Markit iBoxx ABF Pan-Asia Index in January 2024. Ten-year bond yields rose by 16 basis points, leading to a negative 1.2% bond return in South Korean won terms. Indeed, the South Korean won also declined by almost 3.5%. Economic data releases remained mixed, with improvements in industrial production but a decline in retail sales. Consumer inflation data surprised to the downside in December 2023, and the Bank of Korea kept interest rates unchanged. However, the policy tone was more dovish, and market participants expect a rate cut cycle to begin in the second half of 2024.

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