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Asian Bond Yields Touch Their Highest Level in a Decade

Surprisingly upbeat newsflow saw bond prices decline and yields reach decade-long highs. This was coupled with a rate-hike pause being expected across most markets.

SSGA Fixed Income Portfolio Strategists

In September 2023, the Markit iBoxx ABF Pan-Asia index returned -1.97% on an unhedged basis in US-dollar terms. On a US-dollar-hedged basis, the index was down by -0.66%.

Positive economic surprises, albeit from a low base, across major Asian economies saw government bond yields rise by an average of 25 basis points in September 2023. This was still relatively modest compared to the 46 basis point increase in yields witnessed in the United States. Consequently, even though bond yields in China remained relatively low, aggregate bond yields within the Markit iBoxx ABF Pan-Asia index climbed to almost the highest level in a decade.

Meanwhile, the rate-hiking cycle has now paused in most Asian markets. The yield per unit of duration has also improved to the top decile, suggesting investors are better compensated for the interest-rate risk taken.

Market Local Currency Bond Return FX Return Total Return (in USD)
Philippines 0.0% 0.1% 0.1%
China -0.5% -0.2% -0.7%
Hong Kong -1.1% 0.2% -0.9%
Malaysia -0.6% -1.0% -1.6%
Singapore -0.9% -0.8% -1.7%
Indonesia -0.9% -1.6% -2.4%
Korea -1.0% -2.0% -3.0%
Thailand -2.5% -4.3% -6.7%

Economic Data Remains Weak in the Philippines

Philippines (+0.1%) was the only market to deliver positive returns within the index. Long-term bond yields saw a minor increase compared to other economies, as Purchasing Managers’ Index (PMI) surveys and trade data remained weak. This led the Bangko Sentral ng Pilipinas (BSP) to keep interest rates on hold. However, consumer inflation data for August 2023 and September 2023 was surprisingly strong, which led markets to expect a rate hike at the BSP’s November policy meeting.

Unexpectedly Positive Newsflow in China

China (-0.7%) also saw a relatively modest increase in bond yields in September 2023, as economic data and leading economic indicators, on aggregate, were surprisingly positive. Meanwhile, the People’s Bank of China (PBOC) kept interest rates unchanged, given mortgages were already at record lows. It also cut the reserve requirement ratio (the amount of money banks must keep in reserve) for the second time this year to spur lending and support the economic recovery. Notably, the PBOC said it would strive to maintain a stable foreign exchange rate.

Improving Trade Data Offset by Weaker Retail Activity

In line with other global markets, Hong Kong (-0.9%) witnessed a significant rise in its long-term government bond yields (up by 32 basis points) in September 2023, leading to negative local-currency bond returns. Economic data remained mixed, with better-than-anticipated trade numbers balanced by softer retail sales and inflation. As expected, the Hong Kong Monetary Authority kept interest rates unchanged at 5.75%, which aligned with the US Federal Reserve, while mortgage rates rose to their highest level in over a decade.

Malaysian Ringgit Weakness Dents Bond Returns

Malaysia (-1.6%) experienced a relatively modest 13 basis point increase in the 10-year government bond yield, while a depreciating Malaysian ringgit further detracted from returns in US-dollar terms. The Bank Negara Malaysia kept interest rates unchanged as inflation declined to the lowest level in two years. While the central bank expects inflation to stay within a reasonable range over the coming year, market participants anticipate a prolonged pause in the policy rate.

Industrial Production and Retail Sales Slide in Singapore

Singapore’s (-0.9%) local-currency bonds remained under pressure, with yields touching their highest level since 2008/2022. The Singapore dollar also witnessed a modest depreciation. Yields increased in line with global trends despite economic data (notably industrial production and retail sales) moving significantly lower compared to market expectations. The Monetary Authority of Singapore is expected to maintain its current policy stance as inflation has declined in line with expectations.

Indonesian Yields Rise to a Three-Year High

Indonesia (-2.4%) saw the most significant monthly bond yield increase in more than three years, while the Indonesian rupiah continued to depreciate, reaching its weakest level since January 2023. Domestic economic data showed a mixed picture, with resilient auto sales and consumer confidence balanced by a larger-than-expected decline in imports. Despite a recent spike in food inflation, Bank Indonesia kept interest rates unchanged for an eighth consecutive meeting. The central bank also intervened in the currency market and was prepared to repurchase bonds to stem market volatility.

Price Rises Remain Elevated in Korea

In Korea (-3%), long-term bond yields reached their highest level since December 2022, while the Korean won also saw a substantial depreciation due to ongoing US-dollar strength. Although Korea’s trade balance improved, consumer inflation was more robust than predicted for a second consecutive month (August 2023 and September 2023). Consequently, the central bank indicated that interest rates would stay higher for longer. That said, further interest-rate hikes are unlikely as economic momentum and the property sector remain weak.

Interest Rate Hike Amid Persistently High Inflation

Thailand (-6.7%) was the weakest-performing Asian market in the Markit iBoxx ABF Pan-Asia index in September 2023. Bond yields increased to almost their highest level since 2014, while the Thai baht witnessed a substantial depreciation. After unexpectedly strong headline inflation, the Bank of Thailand surprised the market by raising interest rates in late September 2023, as it anticipates improving growth (and persistently high inflation) due to the fiscal stimulus measures announced by the new government.

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