Insights

Asian Bonds Dip on US Dollar Strength and Weak Chinese Data

Asian bond returns were held in check by a strengthening US dollar coupled with softer manufacturing, import, and industrial data from China.

SSGA Fixed Income Portfolio Strategists

June 20, 2023

In May 2023, Asian bond markets faced renewed headwinds from a strengthening US dollar and weaker-than-expected Chinese economic data. The Markit iBoxx ABF Pan-Asia Index returned -1.36% on an unhedged basis in US dollar terms and +0.34% on a USD hedged basis. During the month, central banks in Malaysia, Hong Kong, and Thailand raised interest rates at their policy meetings. Meanwhile, policymakers in Indonesia, South Korea, and the Philippines kept borrowing costs unchanged.

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Philippines	1.50%	-1.25%	0.23%
Korea	-1.17%	0.84%	-0.34%
Hong Kong	-0.82%	0.22%	-0.60%
Indonesia	1.66%	-2.25%	-0.62%
Singapore	-0.22%	-1.34%	-1.56%
Thailand	-0.17%	-1.59%	-1.76%
China	0.77%	-2.58%	-1.83%
Malaysia	0.32%	-3.38%	-3.07%

Surprisingly Low inflation and a Rate-Hike Pause

Philippines (+0.23%) was one of the best-performing local-currency bond markets in May 2023. Bond yields declined to almost their lowest levels this year, supported by unexpectedly low consumer inflation data. At its policy meeting, the Bangko Sentral ng Pilipinas signaled a long pause in its interest-rate-hiking path and reduced its inflation projections. However, the Philippine peso weakened against the US dollar, impacted by a larger-than-anticipated trade deficit dented by weak external demand and the appreciating US dollar.

Currency Strength Helps Offset Further Losses

Korea (-0.34%) saw its local-currency bonds deliver negative returns in May 2023. However, a strengthening Korean won partially offset the decline (in USD terms). At its policy meeting, the Bank of Korea kept interest rates unchanged but signaled a more assertive policy stance, causing bond yields to rise, which also supported the Korean won. Notably, Korea’s trade deficit was smaller than predicted, driven by an unexpectedly large fall in imports.

Interest-Rate Hike to Maintain Currency Peg

Hong Kong (-0.6%) bonds declined during the month, with bond yields increasing in line with US Treasury yields. Following the US Federal Reserve’s rate hike, the Hong Kong Monetary Authority (HKMA) raised interest rates to 5.5%, the highest since 2008. This was done to maintain the currency peg against the US dollar. Notably, aggregate cash balances (the amount of money in clearing and reserve accounts maintained by the central and commercial banks) suggested tighter liquidity conditions as the HKMA continued with its currency interventions to defend the US dollar peg.

Local-Currency Bond Strength Outweighed by Currency Declines

Indonesia’s (-0.62%) local-currency bonds rose, although a depreciation in the Indonesian rupiah from its strongest levels of 2023 led to negative returns in US dollar terms. Bond yields declined to their weakest levels this year as consumer inflation fell further to just above the central bank’s target, while external trade numbers were notably soft. Bank Indonesia (BI) kept interest rates unchanged for a fourth consecutive meeting. BI continued its policy of selling short-term government securities in the secondary market under its ‘Operation Twist’ intended to support the Indonesian rupiah.

Improving Economic Data in Singapore

Singapore’s (-1.56%) local-currency bonds also produced negative returns, with prices impacted by a weakening Singapore dollar and higher bond yields. The latter were underpinned by better-than-predicted economic data releases (manufacturing and retail sales) and unexpectedly robust consumer inflation.

Market Caution Following Thailand’s General Election

Thailand (-1.76%) delivered broadly flat local-currency bond performance and overall negative returns (in USD terms), as the Thai baht depreciated in May 2023. Political uncertainty persisted after the Thai general election, with bond yields moving sideways during the month. Despite a sharp decline in inflation over the past six months, the Bank of Thailand hiked interest rates to their highest since 2015, given Thailand’s real (inflation-adjusted) interest rates were relatively low compared to other Southeast Asian markets.

Declining Bond Yields Balanced by Yuan Weakness

China’s (-1.83%) local-currency bond returns were positive in May 2023. Bond yields across the curve declined to their lowest in 2023, driven by weaker-than-expected economic data (manufacturing, imports, and industrial production) and surprisingly low inflation. However, the Chinese yuan depreciated to its lowest levels against the US dollar this year (the dollar moved back above 7.0), leading to negative returns in US dollar terms.

Malaysian Ringgit Under Pressure Amid Rate Hikes and Softer Trade Data

Malaysia (-3.07%) was the worst-performing local-currency bond market in US dollar terms. That said, Malaysian ringgit returns were modestly positive. The Bank Negara Malaysia unexpectedly hiked interest rates at the start of the month, which took borrowing costs back to pre-pandemic levels. This move came ahead of subsidy reforms that may trigger higher inflation. Yet, the rate hike failed to stem a decline in the Malaysian ringgit as the narrowing difference between Malaysian interest rates and those in the US acted as a headwind. A smaller-than-expected trade surplus was also unhelpful for Malaysia’s currency.

Footnotes

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