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Market Commentary November 2020

SSGA Fixed Income Portfolio Strategists

December 15, 2020

EM Asia bond markets saw positive returns in November overall. The Markit iBoxx ABF Pan-Asia Bond Index returned +2.04% on an unhedged basis in US dollar terms, while it was down -0.08% on a USD hedged basis. Indonesia bond market performed the best, while Hong Kong bonds performed the worst over the month. Indonesia bond markets returned +6.3% over the month, with both FX (+3.6%) and local rates (+2.7%) contributing. Bank Indonesia (BI) cut the 7d reverse repo rate by 25bp to 3.75% in its November meeting against consensus forecast. This cut was following three consecutive meetings where the policy rate was left unchanged. Headline CPI increased to 1.59% y/y in November from 1.44% in October, but still below BI’s 2-4% target range. Market participants expect further policy easing as the economic recovery will likely fall short of BI’s projections this year.

Thailand bonds returned +3.3%, most of it from the stronger Baht (+3.0%) over the month. While Bank of Thailand (BoT) left its policy rate unchanged at 0.50%, in line with consensus expectations, the THB saw appreciation because of foreign capital inflows following recent vaccine developments. The BoT seems to feel that further cuts could undermine financial stability and has left its policy rate unchanged at four consecutive meetings since June. Investors have been focusing on the recent political risks and the continued hit to tourism, a main drag on the economy.

Korea bond markets returned +1.9% over the month. The KRW ended the month stronger (+2.5%) and weakness was in local currency bond returns (-0.7%). The central bank left the base rate unchanged at 0.5% and upgraded both 2020 and 2021 GDP growth by 20bp to -1.1% and 3.0% respectively, as export recovery continues to offset the negative impact from the virus. It ruled out policy normalization at this stage as well. Heavy supply, the central banks’ limited bond purchases and the ongoing growth recovery, all led to bearish pressure on rates. China bonds saw returns of +1.8% over the month, almost all from FX (+1.7%). CNY was supported by the ongoing strength in PMIs, exports, Industrial Production, faster catch-up in services and portfolio inflows from its sizeable carry. Tail risks from trade policy have eased in the last month and hopes of tariff reductions have led to the currency’s strength as well.

Singapore bonds were up +1.8% over the month in USD terms. FX returns were +2.1%, while local currency bond returns were negative (-0.3%). The Monetary Authority of Singapore appears to believe in expansionary fiscal policy as being far more effective than FX policy in supporting the economy. Exports and manufacturing have proven to be relatively resilient and have supported the FX in addition to vaccine hopes, while labour market conditions do not appear to have stabilised yet. 

Philippines bonds were returned +1.2% overall, evenly split between local currency bond and FX components. Bangko Sentral ng Pilipinas (BSP) cut the policy rate to an all-time low of 2.00% in its November meeting. The central bank has now cut the policy rate by a cumulative 200bp since the COVID-19 outbreak began. Foreign portfolio inflows remain weak and PHP’s beta to risk sentiment remains relatively low due to a weaker than expected growth outlook for Q4 20 and Q1 21, from a material decline in fiscal spending.

Malaysia was among the underperformers, returning 1.0% (FX: +2.2%, Local currency: -1.2%). Malaysia lagged the Asia EM rally as a resurgence of COVID infections resulted in renewed restrictions that dampened the economic outlook for the country. Against this backdrop, Bank Negara Malaysia kept its policy rate unchanged at 1.75%, reiterating that it considers monetary policy to be “appropriate and accommodative”.

Hong Kong bond markets returned 0.0% over the month, with both the local currency bond component and the FX staying flat. Repeated new waves of local infections (currently in 4th wave), doubtful recovery in retail sales and other tourism-related businesses has weighed on sentiment.