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Flat Bond Returns Mask an Injection of Optimism in China


SSGA Fixed Income Portfolio Strategists


February 22, 2020


Asian bonds saw modest negative returns in January. The Markit iBoxx ABF Pan-Asia Index declined by -0.68%, on an unhedged basis, in US dollar (USD) terms, down -0.37% on a USD-hedged basis. China's bond market was the key outperformer, buoyed by the strength of the renminbi. In contrast, South Korea's struggling won resulted in its bond markets returning the worst monthly regional performance. 

Renminbi Shines on Export Demand and Industrial Production

China was a significant positive contributor over January, returning 1.18%, thanks primarily to foreign exchange (FX) performance. The China renminbi continued to strengthen in January, on the back of sustained improvement in manufacturing sectors, supported by exports, and industrial production growth, which was driven by IT-related sectors. The Lunar New Year disruption to production and exports is expected to be smaller than usual, given that the authorities and companies urged people not to travel back to their hometowns over the holiday period. Despite positive developments, some challenges remain. Notably, the markets' wariness about a new outbreak of COVID-19 in China's northern provinces and the ongoing withdrawal of liquidity by the People's Bank of China. 

Inflation Puts a Halt to Easing

In the Philippines, bonds returned +0.24% overall. The local-currency component provided +0.35%, which was partially offset by a -0.11% fall in the FX component. Hopes for further easing ended as headline inflation jumped to 4.2% year on year – this is the highest rate since January 2019, breaching the upper band of the target range of 2–4% set by the Bangko Sentral ng Pilipinas (BSP). It appears market participants expect the BSP to avoid further intervention over the medium term. 

Fiscal Caution and Economic Stagnation

Bond markets in Hong Kong languished in January, returning -0.11% over the month. Consumer sentiment, the labour market and service exports remained weak, as inbound tourism remained at a standstill. Consequently, the local-currency bond component slipped -0.10%, and FX was almost flat. Despite ample fiscal reserves, Hong Kong's government appears cautious over its fiscal position. This deliberate approach is most likely underpinned by concerns about buffering unexpected shocks, which is unsurprising considering the events of the past 12 months.

Vaccination Speed Crucial to Tourism Recovery

Thailand's bond market returned -0.18%, with the FX component detracting -0.08%. Headline Consumer Price Index continued to decline in January, as food prices eased further. However, a slow vaccination drive in 2021 is likely to delay any significant recovery in tourism, a key contributor to gross domestic product (GDP), in the near term. Market participants expect the Bank of Thailand to keep its policy rate steady at an all-time low of 0.50% in the medium term.

Limited Fiscal and Monetary Wiggle Room as Cases Surge

A selloff in local rates contributed (-0.86%) to Indonesia's bond market returning -0.72% over January. Unlike its regional peers, Indonesia managed to contain its first wave of infections. However, subsequent outbreaks have been less well managed, and Indonesia is now struggling to quell a resurgence in COVID-19. In this context, the scope for further policy rate cuts in 2021 is limited, with any action highly dependent on the rupiah's stability. Fiscal support looks likely to wane too, as the government has budgeted a smaller increase in expenditure. 

Malaysia's Central Bank Forecasts Growth Improvements from the Second Quarter

Malaysian bonds returned -1.08%, with both the local-rates component (-0.21%) and FX (-0.88%) detracting. At its January meeting, Bank Negara Malaysia kept its policy rate unchanged at 1.75%, announcing that banks' flexibility to use government paper to meet the 2% statutory-reserves requirement will be extended until the end of the year. Even though targeted containment measures have intensified, the central bank expects growth to improve from the second quarter onwards, driven by a global recovery, continued support from policy measures and higher oil production. Morale is also likely to be boosted by the expected rollout of vaccines. 

Encouraging Vaccination Prospects may not Shield Singapore Bonds from Global Sentiment 

In line with the risk-off sentiment experienced across markets in January, Singapore’s bonds were down -1.85% over the month in USD terms. Singapore is expected to be one of the first in the region to achieve widespread vaccination of its population – most likely by the third quarter of 2021. Fiscal support, which saw the deficit at -15.8% of GDP last year, is expected to be gradually tapered, but the deficit for the next financial year looks set to remain large by historical standards.

The Won Weighs on South Korean Bonds

South Korea's bond market was down by -3.10% over January, with FX a significant laggard. The South Korean won was the worst performer (-2.9%). The currency suffered a volatile start to the year. Its performance hinged on portfolio investment flow trends, notably a sharp increase in the appetite for foreign equities among South Korean investors.