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Easing Delta Concerns Boost Asia’s Bond Markets

Asian bond markets were boosted by easing concerns about the Delta-variant and renewed confidence in the global recovery. 

SSGA Fixed Income Portfolio Strategists


Overall, Asian bond markets registered a positive return in August 2021, with the Markit iBoxx ABF Pan-Asia Index gaining +0.52% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the Index was down by -0.10% on a USD hedged basis. Delta-variant concerns eased during the month, with slowing hospitalization and case rates in many territories. Consequently, there was a return of recovery-focused trades in emerging markets. This was particularly apparent in the last week of August when those regional currencies most closely linked to broad changes in the economic climate or movements in commodity prices outperformed.

Looser COVID measures boost Indonesia’s economy

Indonesia was the best performing market in August, with a return of +2.6%. Both the rates and foreign exchange (FX) components contributed equally. Year-on-year gross domestic product (GDP) growth for the second quarter of 2021 returned to positive territory (7.1%), as social-distancing measures eased and domestic demand improved. At its August policy meeting, Bank Indonesia left the short-term lending rate unchanged at 3.5%, in line with market expectations. The central bank also downplayed the impact of a talked-about reduction in the US Federal Reserve’s economic-support program. Furthermore, it underlined a commitment to helping the recovery by keeping the exchange rate stable amid low consumer inflation. 

Thailand supported by more robust manufacturing output

Thailand was up by 2%, with baht (+1.8%) strengthening a significant factor in the market's rise. The currency recovered from weakness in July on expectations that many COVID-related restrictions could be relaxed in September: the seven-day average of new cases has decreased since 18 August. Meanwhile, data showed that the economy ended five straight quarters of contraction with year-on-year growth of 7.5% in the second quarter of 2021. And even as tourist arrivals remain negligible, manufacturing output has improved, growing by 2.4% quarter on quarter (seasonally adjusted).

Political change in Malaysia may affect the fiscal deficit

Malaysia gained +1.8%, which was entirely driven by rupiah strength. The currency climbed to its highest level in more than two months amid heavy flows into the stock market. Headlines were dominated by the resignation of the Prime Minister and his cabinet, as they no longer commanded a parliamentary majority. The subsequent political noise and uncertainty are expected to have a negative impact on Malaysia’s fiscal deficit (where spending exceeds income), as the next government is unlikely to risk the economic recovery for the sake of narrowing the deficit.

Further quarantine measures in Manila

Across in the Philippines, the market rose by +0.3%, with peso strengthening (+0.9%) offsetting weakness in local currency bonds (-0.6%). Bangko Sentral ng Pilipinas (BSP) kept its overnight borrowing rate unchanged at 2% in August, noting that the reimposition of enhanced quarantine measures in Manila and Laguna pose risks to the ongoing recovery. BSP also increased its inflation forecast for 2021 to 4.1%, which slightly exceeds its 2%–4% target range.

Services and manufacturing weaken in China

China was up by +0.2%, driven by its local currency bonds. The FX element remained flat. Manufacturing output declined for the fifth straight month in August, with weaker demand from heavy or polluting industries, such as crude oil and coal, reflecting the government efforts to achieve its carbon-neutral goals. Also, strict, zero-tolerance COVID lockdowns weighed on the services sector.

Reduced government support affects Singapore

Singapore bonds lost -0.1% over the month, with the local currency (-0.8%) and FX components (+0.7%) moving in opposite directions. Even as increasing mobility and a high vaccination rate in Singapore are positives, the negative outlook for global bonds, together with the scaling back of emergency-support measures, has affected fixed-income prices.

Healthier economic growth forecast in Hong Kong

Hong Kong saw a modestly negative return of -0.4% over the month, with local currency bonds (-0.3%) hampering the market’s rise. Hong Kong’s economic growth forecast range for 2021 was raised to 5.5%–6.5% from the previous 3.5%–5.5%, as exports, fixed-asset investments, and consumer spending continue to expand.

Foreigners reduce their exposure to Korea

Korea returned -0.8% over the month. This was entirely due to the FX element. The depreciation of Korea’s currency, the won, was partly a result of foreign investors selling their equity holdings. However, there was also a knock-on effect from China’s modest economic slowdown, as it is a net importer of Korean goods.