Asian Bonds Defy Headwinds with a Positive Quarterly Return
The iBoxx ABF Pan-Asia Bond Index delivered mixed results in June 2026, with the US-dollar unhedged version declining by 1.06%, while the US-dollar hedged version gained 0.21%. The performance gap was primarily driven by currency weakness across the region, which detracted 1.27% from unhedged returns during the month.
Market Overview
Underlying bond market performance was mixed in June 2026, reflecting varying domestic macroeconomic and policy dynamics. Government bond yields rose in Indonesia (+43 basis points), Malaysia (+4 basis points), South Korea (+2 basis points), Hong Kong (+2 basis points), and China (+1 basis point), creating headwinds for fixed income returns. Conversely, yields declined in the Philippines (-48 basis points) and Thailand (-27 basis points), supporting bond performance in those markets. Overall, positive local bond returns helped the hedged index generate modest gains, while the strengthening US dollar remained the dominant factor weighing on unhedged investor returns.
During the second quarter of 2026 (Q2 2026), Asian bond markets generated positive returns despite ongoing currency headwinds across the region. The iBoxx ABF Pan-Asia Bond Index (US-dollar unhedged) returned 0.30%, while adverse currency movements detracted 0.83% from performance. In contrast, the US-dollar hedged version gained 1.13%, highlighting the benefit of mitigating foreign exchange volatility and capturing underlying local bond market strength.
Local bond market performance in Q2 2026 was supported by declining government bond yields in Singapore (-25 basis points), Thailand (-20 basis points), the Philippines (-11 basis points), China (-9 basis points), and Malaysia (-2 basis points). However, these gains were partially offset by rising yields in Hong Kong (+39 basis points), Indonesia (+30 basis points), and South Korea (+22 basis points).
On the monetary policy front, Bank Indonesia raised its policy rate by 100 basis points in Q2 2026, while Bangko Sentral ng Pilipinas increased its benchmark rate by 25 basis points to 4.75% in May 2026. Meanwhile, other major central banks across the region maintained a steady policy stance, reflecting a cautious approach amid evolving economic conditions.
| Market | Local Currency | FX Return | Total Return USD |
|---|---|---|---|
| Philippines | 3.8% | 0.4% | 4.2% |
| Thailand | 1.9% | -1.9% | -0.1% |
| China | 0.1% | -0.3% | -0.1% |
| Hong Kong | -0.3% | -0.1% | -0.4% |
| Singapore | -0.1% | -1.3% | -1.5% |
| Indonesia | -1.9% | -0.1% | -2.0% |
| Malaysia | 0.2% | -2.6% | -2.3% |
| Korea | -1.2% | -2.7% | -3.9% |
*Please note that the returns shown above relate to the month of June 2026.
Strengthening Economic Newsflow Underpins the Philippine Market
Philippines (USD Unhedged: 4.2%)
The Philippines' local bond market rallied in June 2026, with the 10-year government bond yield falling sharply by 48 basis points and the Philippine peso posting a positive 0.4% return, bringing the quarterly decline in the 10-year yield to 11 basis points. The rally was supported by improving macroeconomic signals, as headline inflation eased for a second straight month to a three-month low of 6.4% from 6.8% in May 2026, driven by moderating transport and food prices, though core inflation ticked higher to 4.4%, pointing to sticky underlying pressures. Growth momentum held firm, with the S&P Global Philippines Manufacturing Purchasing Managers’ Index (PMI) survey edging up to 50.9 from 50.8, marking a second consecutive month of expansion on stronger new orders and stable employment, even as business confidence slipped to a five-month low. Labour market conditions softened slightly, with the unemployment rate rising to 4.8% in May 2026 from 4.7% in April 2026. Against this backdrop of easing headline inflation but persistent core pressures and elevated global oil costs, Bangko Sentral ng Pilipinas raised its benchmark reverse repurchase rate by 25 basis points to 4.75% at its 18 June 2026 meeting – a second consecutive hike – signalling readiness to act further to steer inflation back to the 3.0% target.
A Broadly Supportive Backdrop in Thailand
Thailand (USD Unhedged: -0.1%)
Thailand's 10-year government bond yield declined by 27 basis points in June 2026, bringing the quarterly drop to 20 basis points, though the Thai baht weakened, posting a negative return of 1.9% over the month. Economic data remained broadly supportive, with the S&P Global Thailand Manufacturing PMI survey rising to a three-month high of 53.6 from 52.6 in May 2026, as production growth accelerated to its fastest pace since December 2025 on robust demand and a fourteenth consecutive month of new order growth. Headline inflation eased to 2.42% (y/y) from 2.79% in May 2026, marking the slowest pace in three months as lower global crude oil prices weighed on energy costs, while core inflation accelerated to 1.23%, the fastest since June 2023. Labour market conditions softened, with the unemployment rate rising to 0.94% in the first quarter of 2026 from 0.70% in the previous quarter. Against this backdrop, the Bank of Thailand’s monetary policy committee voted unanimously to keep the benchmark policy rate at 1.0% at its 24 June 2026 meeting, maintaining an accommodative stance to support an uneven recovery, while flagging that headline inflation is expected to exceed the target range for the remainder of 2026 before easing in 2027.
Broad Improvements in Activity Balanced by Consumer Weakness
China (USD Unhedged: -0.1%)
China's economy grew unevenly in Q2 2026. Exports stayed resilient, led by artificial intelligence (AI)-driven high-tech manufacturing. Retail sales weakened and the property sector was still a drag, while investment softened. Policy support stayed targeted rather than broad, leaving the recovery uneven across sectors. Manufacturing activity remained in expansionary territory, with the official NBS Manufacturing PMI survey rising to 50.3 in June 2026 from 50.0 in May 2026, driven by stronger high-tech export demand linked to the AI investment cycle, while the Caixin Manufacturing PMI survey eased marginally to 51.7 from 51.8, indicating some moderation in momentum. Broader economic activity also improved modestly, as the official Composite PMI survey increased to 50.6 in June 2026 from 50.5 in May 2026, supported by a slight rise in the Non-Manufacturing PMI survey to 50.2 from 50.1. External demand continued to be a key growth driver, with exports surging 19.4% y/y in May 2026 to a record US$376.8 billion, accelerating from a 14.1% increase in April 2026, while imports rose by 27.5%, reflecting resilient domestic demand and higher commodity purchases. Meanwhile, the People’s Bank of China (PBOC) maintained an accommodative policy stance, leaving the one-year and five-year loan prime rates unchanged at 3.0% and 3.5%, respectively, for the 13th consecutive month. Policymakers continued to favour targeted, structural tools over broad-based easing, balancing growth support with Chinese renminbi stability and bank margin considerations. Inflation pressures remained contained, with consumer prices rising by 1.2% y/y in May 2026, unchanged from April 2026, while producer price inflation accelerated to 3.9% from 2.8%, partly due to higher commodity prices and favourable base effects. In fixed income markets, government bond yields declined in Q2 2026, with the 10-year yield falling by 9 basis points and the 2-year yield declining by 5 basis points, resulting in a modest bull-flattening of the curve (where long-term interest rates fall at a faster pace than short-term interest rates) amid ongoing PBOC support through reverse repurchase operations (a short-term transaction used to manage liquidity). The Chinese renminbi appreciated by around 1.56% against the US dollar in Q2 2026 and closed at 6.79, supported by strong PBOC daily fixings and China’s robust external position underpinned by resilient export performance.
Hong Kong Sees an Uptick in Business Activity
Hong Kong (USD Unhedged: -0.4%)
Hong Kong's 10-year government bond yield edged up by 2 basis points in June 2026, extending the quarterly rise to 39 basis points, while the Hong Kong dollar was broadly flat, posting a marginal negative return of 0.1% over the month. Inflationary pressures firmed slightly, with headline inflation rising to 2.0% y/y in May 2026 from 1.7% in April 2026, the highest reading since April 2025, driven by faster price growth in electricity, transport, and miscellaneous services. Business activity gained further traction, with the S&P Global Hong Kong SAR PMI survey climbing to 52.0 in June 2026 from 50.4 in May 2026 – the strongest reading since February 2026 – supported by healthier output and new orders, though employment continued to edge lower. Labour market conditions remained stable, with the seasonally adjusted unemployment rate unchanged at 3.7% in the three months ending May 2026. Meanwhile, the Hong Kong Monetary Authority kept its base rate steady at 4.0% on 18 June 2026, in lockstep with the US Federal Reserve, reflecting the linked exchange rate system that anchors Hong Kong’s monetary policy to the US and keeps financial conditions relatively tight.
Stable Inflationary Backdrop in Singapore
Singapore (USD Unhedged: -1.5%)
Singapore's 10-year government bond yield was broadly unchanged in June 2026, taking the quarterly decline to 25 basis points, while the Singapore dollar weakened, posting a negative return of 1.3% over the month. Headline inflation in May 2026 remained at 1.8% y/y for a second consecutive month and core inflation held at 1.4%, reflecting stable underlying price pressures. Manufacturing activity extended its expansionary streak, with the SIPMM Manufacturing PMI survey rising to 51.3 in June 2026 from 51.0 in May 2026 – the highest since November 2018 and an 11th straight month of growth – supported by robust AI-driven semiconductor demand. Broader private sector activity strengthened further, with the S&P Global Singapore PMI survey climbing to 57.4 from 56.7, buoyed by sustained new business growth and renewed hiring. Economic activity was resilient, with gross domestic product (GDP) growth for the first quarter of 2026 revised sharply higher to 6.0% y/y – the strongest pace since the third quarter of 2024 – while the Monetary Authority of Singapore kept its 2026 growth forecast at 2.0%–4.0% amid downside risks from the Middle East conflict.
Dual Rate Hikes to Bolster the Indonesian Rupiah
Indonesia (USD Unhedged: -2.0%)
Indonesia's 10-year government bond yield rose sharply by 43 basis points in June 2026, taking the quarterly increase to 30 basis points, while the Indonesian rupiah was broadly flat with a marginal negative return of 0.1% over the month. Headline inflation accelerated to 3.34% y/y from 3.08% in May 2026 – the highest since March 2026 and near the upper end of Bank Indonesia's 1.5%–3.5% target range – driven by a 32.1% fuel price hike, while core inflation quickened to a 38-month high of 2.76%. Manufacturing activity slipped back into contraction, with the S&P Global PMI survey falling sharply to 46.9 from 50.0 – the lowest in a year – as new orders declined at the fastest pace in twelve months. Labour market conditions remained supportive, with the unemployment rate in the first quarter of 2026 at 4.68%, the lowest since the fourth quarter of 1997. In response to persistent Indonesian rupiah weakness and rising inflation, Bank Indonesia delivered back-to-back rate hikes – a surprise 25 basis point off-cycle move on 9 June 2026, followed by another 25-basis point increase to 5.75% on 18 June 2026 – bringing cumulative tightening to 100 basis points since May 2026.
Manufacturing Returns to Expansionary Territory
Malaysia (USD Unhedged: -2.3%)
Malaysia's 10-year government bond yield edged up by 4 basis points in June 2026, though the quarterly change remained marginally negative at -2 basis points, while the Malaysian ringgit weakened, posting a negative return of 2.6% over the month. Inflationary pressures firmed modestly, with headline inflation rising to 2.0% y/y in May 2026 from 1.9% in April 2026 – the highest since July 2024 – driven by firmer food, housing, and utilities prices, while core inflation held steady at 2.0%. Manufacturing activity returned to expansion, with the S&P Global Malaysia Manufacturing PMI survey rising to 50.7 in June 2026 from 49.0 in May 2026, as new orders and output rebounded, though employment stayed flat amid lingering caution. Labour market conditions remained broadly stable, with the unemployment rate edging up marginally to 3.0% in April 2026 from 2.9% previously. Meanwhile, Bank Negara Malaysia kept the overnight policy rate unchanged at 2.75%, maintaining an accommodative yet balanced stance amid moderate inflation and steady growth, while flagging heightened uncertainty from the Middle East conflict.
South Korea’s Policy Tone Turns Hawkish
South Korea (USD Unhedged: -3.9%)
South Korea's 10-year government bond yield edged up by 2 basis points in June 2026, extending the quarterly rise to 22 basis points, while the Korean won weakened, posting a -2.7% return of over the month. Headline inflation accelerated to 3.2% y/y from 3.1% in May 2026 – the fastest pace since December 2023 and further above the Bank of Korea's 2.0% target – driven by higher transport and food costs amid a weaker Korean won and elevated fuel prices. Manufacturing activity moderated, with the S&P Global Manufacturing PMI survey easing to 52.1 from 54.8 – the softest expansion in four months – as new orders and output grew at their weakest pace of 2026 amid supply shortages and Middle East–related disruptions. Labour market conditions remained stable, with the unemployment rate steady at 2.8% in May 2026. The Bank of Korea kept its policy rate unchanged at 2.5% for an eighth consecutive hold, while Governor Shin Hyun-song reinforced a hawkish tilt in June 2026, ruling out a July 50 basis point "big step" but signalling that a rate hike is unavoidable amid persistent price pressures.