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Asian Bonds Fall Amid Inflationary Concerns and Global Tensions

Asian bonds retreated in January 2022 as investors were
unsettled by inflationary pressures, market volatility, and geopolitical tensions.

SSGA Fixed Income Portfolio Strategists


Except for China, Asian bond markets experienced negative returns in January 2022. The Markit iBoxx ABF Pan-Asia Index declined by -0.74% on an unhedged basis in United States dollar (USD) terms. The index also fell on a USD hedged basis (-0.55%). 

The month saw investors price in the prospect of higher US interest rates, as the market’s economy is nearing full employment and inflation is running well above target. 

That said, when compared to previous instances when the US Federal Reserve (Fed) reduced the scale of its asset purchases, Asian markets now have more robust economic bases, relatively small current-account deficits, and higher foreign-exchange (FX) reserves. 

Despite this, bouts of local inflation, volatility in global equity markets, and geopolitical risks dented bond performance in January 2022.

Market Local-Currency Return Foreign-Exchange (FX)  Return Return (in USD)
Korea -2.10% -1.39% -3.47%
Thailand -1.15% 0.18% -0.97%
Indonesia -0.02% -0.90% -0.92%
Hong Kong -0.86% -0.01% -0.87%
Malyasia -0.45% -0.36% -0.82%
Singapore -0.48% -0.32% -0.80%
Philippines -0.50% 0.03% -0.47%
China 0.95% 0.15% 1.11%

Hawkish Bok unsettles bond investors

Korea saw its local-currency bonds sell off when the Bank of Korea (BoK) raised 7-day repo rate to 1.25% at its January meeting. Furthermore,  the BoK’s overall tone was more Hawkish than expected. Specifically, the bank said that it expects inflation to remain in the 3% range for a considerable time, exceeding the 2% path projected in November 2021. It also downplayed the negative impact from COVID-19 infections, given its gross domestic product (GDP) growth forecast remains on track, with the economy expected to expand by 4% in 2021 and 3% in 2022. Even though the market has a sizeable current-account surplus (exports are higher than imports), this was offset by outflows from the equity market that led to FX weakness during the month.

Investors consider rising inflation in Thailand

Thailand performed poorly, with most of the weakness coming from the local-currency bond segment. The Bank of Thailand revised its 2022 inflation forecast from 1.4% to 1.7%, citing rising global inflation and the possibility of this feeding through to retail prices. While inflation has risen in the past few months, and investors have been demanding a higher interest rate to compensate for the potential risks associated with Thailand’s bonds,market participants expect the Bank of Thailand to leave interest rates unchanged at 0.5% until the end of 2022. They also believe the bank has a clear preference for supporting growth as price pressures from domestic demand remain subdued.

The prospect of Fed policy change impacts the rupiah 

Indonesia fell by -0.92%, almost all of which was driven by the FX element, which weakened in tandem with other currencies that are sensitive to changes in the global economic backdrop. Following its January policy meeting, Bank Indonesia (BI) left 7-day repo rate at 3.5%, in line with market expectations. However, it also announced an increase in the amount of local currency that banks must hold in reserve. Investors believe that if the market prices in a faster-than-expected return to more ‘normal’ conditions by the Fed, then the BI could be forced into hiking its interest rate earlier to defend the rupiah.

Hong Kong reins in liquidity to protect its currency

Hong Kong lost -0.87%, primarily due to the decline of its local-currency bonds. To protect the stability of the Hong Kong dollar, which is pegged to the US dollar, the Hong Kong Monetary Authority (HKMA) reduced the amount of money in the financial system. The HKMA’s aggregate balance, which measures liquidity between the special administrative regions’ banks, is down to HK$363 billion, the lowest since October 2020.

Demand in Malaysia gradually recovers

Malaysia dipped by -0.82%, with both local bonds and FX modestly underperforming. Bank Negara Malaysia (BNM) maintained the interest rate at 1.75% and left the statutory reserve requirement ratio (the amount of money and liquid assets banks must hold in reserve) unchanged at 2%. These moves were in line with market expectations. Meanwhile, core inflation rose to 1.1% year on year in December 2021, up from 0.9% the previous month, as domestic demand is gradually recovering from the pandemic-related restrictions imposed in the third quarter of 2021. Investors expect BNM to start monetary policy ‘normalization’ from the second quarter of 2022.

Inflationary pressures felt in Singapore

Singapore was down by -0.8% over the month in USD terms, with both local bonds and FX modestly underperforming. The Monetary Authority of Singapore (MAS) announced an increase in its 2022 core inflation forecast to 2%–3% (from 1%–2%) as it faces high commodity prices, supply-chain bottlenecks, and labor shortages. Also, in a surprise announcement that was well in advance of the scheduled decision in April, the MAS will allow the Singapore dollar to strengthen more quickly against other currencies.

Price rises remain steady in the Philippines

Philippines declined by -0.47% amid weakness in its local-currency bonds. Even as the Bangko Sentral ng Pilipinas (BSP) faced surprisingly strong GDP growth data, increased mobility levels among the populace, and a recovery in private demand, inflation has remained within the BSP's 2%–4%  target range. This has enabled the bank to keep interest rates steady even as the global monetary policy environment points towards rising interest rate environment. BSP Governor Benjamin Diokno said that interest-rate hikes in the first half of the year are unlikely. 

Lower borrowing costs support China bonds

China performed well, gaining 1.11% on the back of robust returns from its local bonds. In January, the People’s Bank of China (PBOC) cut the borrowing costs for its 1-year medium-term lending facility (MLF) to 2.85%. This followed December’s reduction in the amount of money banks must hold in reserve. The yields on China government bonds moved lower, as market participants expect the PBoC to maintain its supportive stance. Furthermore, the broader economy's health is underpinning the fixed income market, with growth expected to drift lower before stabilizing in 2022 on the back of weak activity in the services sector, a slowing housing market, and energy-control targets.


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