Insights

Asian Bonds Deliver Strong Returns in Q2 2025

In June 2025, the iBoxx ABF Pan-Asia Bond Index (US-dollar unhedged) rose by 1.6%, which marked a sixth straight month of positive returns. The hedged version of the Index was up by 1.0%, while further Asian currency appreciation against the US dollar during the month added to the returns of the unhedged Index. By market, 10-year bond yields declined by the most in Singapore, Indonesia and Thailand (approximately 18 to 24 basis points) but remained almost unchanged in South Korea and the Philippines.

July 27, 2025

State Street Investment Management Fixed Income Portfolio Strategists

Asian bond returns were robust in the second quarter of 2025, with the iBoxx ABF Pan-Asia Bond Index (US-dollar unhedged) gaining 6.3%. Ten-year bond yields, on average, declined by 27 basis points during the quarter, leading to positive price returns, with the US-dollar-hedged version of the Index rising by 2.9%. Asian currencies, on aggregate, appreciated strongly against the US dollar, further aiding the returns of the unhedged Index

By market, 10-year yields fell by the most in Hong Kong and Singapore (-58 basis points and -49 basis points, respectively). Ten-year yields also saw a significant decline of 37 basis points and 45 basis points in Indonesia and Thailand, respectively. In contrast, 10-year yields rose by three basis points in South Korea and 13 basis points in the Philippines. Among the region’s central banks, Bank Indonesia lowered its key interest rate by 25 basis points to 5.5%, while the People’s Bank of China reduced its key rate to record lows in the second quarter of 2025.

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Thailand	2.9%	0.7%	3.7%
Singapore	2.3%	1.3%	3.6%
Indonesia	1.2%	0.3%	1.5%
South Korea	-0.7%	2.2%	1.5%
Malaysia	0.3%	0.8%	1.2%
China	0.5%	0.4%	0.9%
Hong Kong	0.5%	-0.1%	0.4%
Philippines	0.4%	-1.1%	-0.8%

Sharp Drop in Thailand’s Long-Term Yield

Thailand (USD Unhedged: +3.7%): Thailand’s 10-year yield declined by a significant 18 basis points in June 2025, while the Thai baht appreciated by 0.7% leading to strong returns in US-dollar-unhedged terms. Consumer inflation turned negative in April 2025, falling by 0.22% year on year (YoY), while in May 2025 it was down by 0.57% YoY, and in June it declined by 0.25% YoY, primarily due to softer energy and food prices. The manufacturing Purchasing Managers’ Index (PMI) survey returned to expansionary territory in May 2025 (51.2) and June 2025 (51.7) after a contraction in April 2025, while manufacturing production also improved (+1.9% YoY) in April 2025 and May 2025 versus flat growth in March 2025, indicating improving momentum. Notably, the Bank of Thailand reduced its policy rate by 0.25 percentage points to 1.75% in April 2025, in response to subdued inflation and heightened downside risks to the economy. Market consensus expects at least one further rate cut in the second half of 2025.

Uneven Economic Data in Singapore

Singapore (USD Unhedged: +3.6%): Singapore’s 10-year yield also fell significantly (-24 basis points) in June 2025, while the Singapore dollar gained 1.3% leading to strong returns in US-dollar-unhedged terms. Consumer inflation remained low at 0.9% in April 2025 and eased to 0.8% in May 2025. While the manufacturing PMI survey continued to expand in April 2025, growth then slowed in May 2025 and June 2025. Retail sales remained relatively subdued with modest YoY increases of 0.2% in April 2025 and 1.4% in May 2025. The Monetary Authority of Singapore announced policy easing at its April 2025 policy meeting, reducing the slope of the Singapore Dollar Nominal Effective Exchange Rate Index (S$NEER) band due to a deteriorating external outlook, driven by US trade policy and slowing growth and inflation.

Slowing Output and Softer Consumer Confidence

Indonesia (USD Unhedged: +1.5%): In June 2025, Indonesia’s 10-year yield declined by a notable 21 basis points, while the Indonesian rupiah rose by 0.3% leading to a positive US-dollar-unhedged return. In the second quarter of 2025, consumer inflation rebounded after an unexpected deflationary print in February 2025, rising by 1.95% in April 2025 before easing to +1.6% in May 2025, then returning to +1.9% in June 2025. The manufacturing PMI survey contracted to 46.7 in April 2025 and 47.4 in May 2025, pointing to a significant decline in manufacturing activity, while consumer confidence also remained on a downward trend. Bank Indonesia lowered its benchmark interest rate by 25 basis points to 5.5% in May 2025, signaling a more accommodative stance, then kept its policy rate unchanged in June 2025. Investors expect the policy rate to remain static for the remainder of 2025.

Signs of Stabilization in South Korea

South Korea (USD Unhedged: +1.5%): In June 2025, South Korea’s 10-year yield remained almost unchanged, though the South Korean won appreciated by 2.2% leading to strong returns in US-dollar-unhedged terms. Consumer inflation remained rangebound between 1.9% and 2.2% during the second quarter of 2025. The manufacturing PMI survey contracted but showed signs of improvement, and consumer confidence recovered. Despite a resilient labor market, retail sales exhibited mixed trends. The Bank of Korea cut its policy rate by 25 basis points to 2.75% in May 2025, signaling a softening stance amid political transitions and rising tariff-led trade uncertainty. Market consensus expects one more rate cut in the second half of 2025.

Malaysian Inflation at Four-Year Low

Malaysia (USD Unhedged: +1.2%): Malaysia’s 10-year yield declined by just two basis points in June 2025, while the Malaysian ringgit appreciated, leading to positive returns in US-dollar-unhedged terms. Consumer inflation was subdued at 1.2% in May 2025, the lowest reading in more than four years. While the manufacturing PMI survey remained in contraction, an improvement was seen in May 2025 and June 2025. However, industrial production growth slowed significantly to 0.3% YoY in May 2025, the lowest reading since December 2023. Bank Negara Malaysia reduced its overnight policy rate by 25 basis points to 2.75% in early July 2025, in line with market expectations. Investors expect the policy rate to remain unchanged throughout the second half of 2025.

Healthier Consumer Activity, but Deflationary Pressures Persist

China (USD unhedged: +0.9%): China’s 10-year yield declined by six basis points in June 2025, while the Chinese yuan rose by 0.4% leading to positive returns in US-dollar-unhedged terms. In the second quarter of 2025, China’s economic data continued to reflect persistent deflationary pressures and sluggish domestic demand. Industrial production also decelerated over the quarter as tariff uncertainty posed a challenge for the manufacturing sector. However, the consumer sector improved with retail sales accelerating by their fastest pace since November 2023. Overall composite activity surveys showed only a marginal expansion. While demand in the real estate sector remained subdued, the decline in housing prices in the top 70 cities showed some signs of bottoming out. On the policy front, following rate cuts in May 2025, the People’s Bank of China kept its key interest rates unchanged in June 2025 but s a readiness to ease further should growth deteriorate in response to shifting domestic and international conditions. Notably, the Chinese yuan gained 1.3% during the quarter against the US dollar, given declining concerns about the exchange rate amid broad-based US-dollar weakness.

Retail Sales Pick Up in Hong Kong

Hong Kong (USD unhedged: +0.4%): Hong Kong’s 10-year bond yield declined by 13 basis points in June 2025, leading to positive US-dollar-unhedged returns. Consumer inflation remained modest, rising by 2.0% in April 2025 and easing to 1.9% in May 2025. Retail sales improved, with a 2.4% YoY increase in May 2025, ending a prolonged decline. The Hong Kong Monetary Authority maintained its base rate at 4.75%, aligning with the US Federal Reserve, implying a steady interest-rate environment in the second quarter of 2025.

Philippine Long-Term Yield Holds Steady

Philippines (USD unhedged: -0.8%): The Philippines remained the only market in the Pan-Asia Index to post a negative return in June 2025. The 10-year yield remained largely unchanged, while the Philippine peso declined by 1.1% during the month, resulting in a negative unhedged return. Consumer inflation was low and within target: 1.4% in April 2025, 1.3% in May 2025, and 1.4% in June 2025. The manufacturing PMI survey rebounded to 53 in April, indicating a pick-up in growth momentum before decelerating to 50.1 in May 2025 due to slowing new orders and export demand. The unemployment rate continued its positive trend, falling to 3.9% in May 2025. Bangko Sentral ng Pilipinas cut its policy rate by 25 basis points twice in the second quarter of 2025 (April 2025 and June 2025), a move aimed at supporting growth amid moderating inflation. Market participants expect one additional policy rate cut in the second half of 2025.

Footnotes

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