Inflation and risk expectations drive asian bond yields
The iBoxx ABF Pan-Asia Bond Index US-dollar hedged and US-dollar unhedged indices delivered muted performance in May 2026, returning -0.05% and -0.29%, respectively, with currency movements acting as a key drag (-0.24%) on unhedged returns.
State Street Investment Management Fixed Income Portfolio Strategists
Market Overview
Regional bond markets exhibited divergent yield movements. Notably, 10-year government bond yields rose sharply in the Philippines (+43 basis points) and Hong Kong (+27 basis points), while South Korea (+14 basis points) and Thailand (+13 basis points) also recorded moderate increases, reflecting continued upward pressure from inflation expectations and risk premia.
In contrast, Indonesia (-12 basis points), China (-3 basis points), and Singapore (-7 basis points) saw marginal yield declines, while Malaysia remained largely unchanged, indicating a more anchored rate environment. On the monetary front, most Asian central banks kept interest rates unchanged, except for Bank Indonesia, which raised the benchmark rate by 50 basis points to 5.25% at its May 2026 policy meeting. This was a larger-than-expected hike, given investors had anticipated a 25 basis point increase.
| Market | Local Currency | FX Return | Total Return USD |
|---|---|---|---|
| China | 0.5% | 1.0% | 1.5% |
| Singapore | 0.8% | 0.3% | 1.1% |
| Malaysia | 0.2% | 0.1% | 0.3% |
| Thailand | -1.0% | 0.6% | -0.5% |
| Hong Kong | -0.5% | 0.0% | -0.5% |
| Philippines | -2.2% | -0.1% | -2.2% |
| Indonesia | 0.2% | -2.8% | -2.6% |
| Korea | -1.3% | -1.6% | -2.9% |
China’s gradual yet uneven recovery
China (USD Unhedged: 1.5%)
China’s economic activity remained broadly stable in May 2026. Manufacturing stayed in expansionary territory, although momentum moderated, as the Caixin Manufacturing Purchasing Managers’ Index (PMI) survey eased to 51.8 from 52.2 in April 2026, while the official NBS Manufacturing PMI survey edged down to the neutral 50.0 level. In contrast, overall business activity showed some improvement, with the composite PMI survey rising to 50.5, supported by stronger performance in the services sector. External demand remained a key driver of growth, though early signs of moderation are emerging. Export growth remained robust at 14.1% year-on-year (y/y), while imports surged by 25.3% y/y, reflecting resilient domestic demand alongside elevated commodity imports. On the policy front, the People’s Bank of China maintained its accommodative stance, leaving both the one-year and five-year loan prime rates unchanged at 3.0% and 3.5%, respectively. This underscores a balanced policy approach aimed at supporting economic growth while safeguarding financial stability. Inflationary pressures remained contained during the month, with consumer price inflation holding broadly steady at around +1.2% y/y. Meanwhile, producer prices continued to reflect upstream cost pressures, partly driven by elevated commodity prices. In the fixed income markets, government bond yields declined over May 2026, with the 10-year yield falling by 3 basis points and the two-year yield by 6 basis points. This resulted in a modest bull steepening of the yield curve (when short-term interest rates decline more quickly that long-term interest rates), indicating easing near-term rate expectations amid stable macroeconomic conditions. The Chinese renminbi appreciated modestly against the US dollar in May 2026 (+0.91%), driven by a combination of US-dollar softness, policy-guided appreciation, and structural support from China’s external position and evolving export dynamics.
Robust first-quarter GDP in Singapore
Singapore (USD Unhedged: 1.1%)
Singapore’s 10 year government bond yield declined by 7 basis points in May 2026, while the Singapore dollar delivered a modest positive return of 0.3% over the month. Price rises remained contained, with headline inflation holding around +1.8% y/y in April 2026, indicating stable price pressures despite elevated input costs. Manufacturing activity continued to expand, with the PMI survey improving to 51.0 in May 2026 from 50.7 in April 2026, reflecting stronger new orders and sustained export demand, and remaining firmly in expansionary territory. Broader private sector activity also remained robust, although momentum eased slightly, with the composite PMI survey moderating to 56.7 in May 2026, while still signaling solid growth conditions. Economic growth remained resilient in the first quarter of 2026, with gross domestic product (GDP) expanding by 6.0% y/y, supported by strength across manufacturing, trade, and financial services. Meanwhile, short term interest rates remained broadly accommodative, continuing to support overall financial conditions and domestic demand.
Sustained domestic demand and investment activity
Malaysia (USD Unhedged: 0.3%)
Malaysia’s 10 year government bond yield remained broadly unchanged in May 2026, while the Malaysian ringgit delivered a modest positive return of 0.1% over the month. Inflationary pressures remained contained, with the headline number holding at around +1.9% y/y in April 2026, reflecting stable price dynamics across key consumption categories. Manufacturing activity showed signs of moderation, with the S&P Global Manufacturing PMI survey easing to 49.0 in May 2026 from 51.6 in April 2026, indicating a slight contraction amid softer demand conditions and easing output growth. Economic growth was resilient, with GDP expanding by 5.4% y/y in the first quarter of 2026, supported by ongoing domestic demand and investment activity, although moderating from the previous quarter. Labor market conditions continued to be stable, with the unemployment rate holding steady at 2.9%, reflecting a still supportive employment environment. Meanwhile, Bank Negara Malaysia maintained its overnight policy rate at 2.75% in May 2026, preserving an accommodative yet balanced policy stance amid steady growth and manageable inflation.
Accommodative monetary policy to support Thailand’s growth
Thailand (USD Unhedged: -0.5%)
Thailand’s 10 year government bond yield rose by 13 basis points in May 2026, while the Thai baht recorded a positive return of 0.6% over the month. Economic data remained broadly supportive. Manufacturing activity continued to expand, with the S&P Global Thailand Manufacturing PMI survey easing marginally to 52.6 in May 2026 from 52.7 in April 2026, remaining firmly in expansionary territory despite moderating output growth momentum. Inflation picked up but remained within the Bank of Thailand’s target range, with headline consumer prices rising by 2.79% y/y in May 2026, slightly lower than the previous month’s 2.89% increase, reflecting stabilizing price pressures following a prolonged period of weakness. Labor market conditions remained relatively stable, with the unemployment rate near 0.9% in early 2026, indicating continued resilience in employment conditions. Against this backdrop, the Bank of Thailand maintained its benchmark policy rate at 1.0%, keeping monetary policy accommodative to support growth amid moderate inflation dynamics and ongoing external uncertainties.
Expansion across Hong Kong’s services and trade segments
Hong Kong (USD Unhedged: -0.5%)
Hong Kong’s 10 year government bond yield increased by 27 basis points in May 2026, while the Hong Kong dollar remained broadly unchanged. Inflationary pressures were moderate, with headline inflation holding at around +1.9% y/y in May 2026, reflecting stable price dynamics amid steady domestic demand. Economic activity was resilient, supported by the continued recovery in services and trade-related sectors, with growth momentum broadly in line with earlier trends. However, business sentiment showed signs of renewed expansion, as the S&P Global Hong Kong SAR PMI survey rose to 50.4 in May 2026 from 48.6 in April 2026. Labor market conditions were stable, with the unemployment rate holding steady at approximately 3.7%, reflecting a balanced environment. Meanwhile, the Hong Kong Monetary Authority maintained its policy stance in line with US monetary policy, keeping financial conditions relatively tight amid elevated global interest rate levels.
Signs of stability in the Philippines
Philippines (USD Unhedged: -2.2%)
The Philippines’ local bond market weakened in May 2026, with the 10 year government bond yield rising sharply by 43 basis points, while the Philippine peso delivered a marginal negative return of 0.1% over the month. Despite the sell-off in rates, domestic macroeconomic conditions showed signs of stabilization, as headline inflation eased to +6.8% in May 2026 from a three-year high of +7.2% in April 2026, defying expectations of an increase to +7.5%. Growth indicators also improved, with the S&P Global Philippines Manufacturing PMI survey rebounding to 50.8 from 48.3, moving back into expansionary territory on the back of recovering demand, renewed inflows of new orders, and increased production activity. This uptick in business conditions was accompanied by a modest improvement in labor market dynamics, with the unemployment rate edging lower to around 4.7%, reflecting a gradual strengthening in employment. Against this evolving backdrop of easing inflation but improving growth momentum, Bangko Sentral ng Pilipinas maintained its policy rate at 4.5%, signaling a cautious, data-dependent approach as it balances inflation risks with the need to support the ongoing recovery.
Rate rise as indonesia seeks to maintain stability
Indonesia (USD Unhedged: -2.6%)
Indonesia's 10-year government bond yield declined by approximately 12 basis points in May 2026, while the Indonesian rupiah fell by 2.8%. Headline inflation accelerated to +3.08% y/y in May 2026 from +2.42% in April 2026, driven by rising food and energy costs, though it remained within Bank Indonesia's +1.5% to +3.5% target range. Manufacturing activity stabilized, with the S&P Global PMI survey rising to 50.0 in May 2026 from 49.1 in April 2026, returning to the neutral threshold. Economic growth remained robust at +5.61% y/y in the first quarter of 2026 – the strongest reading since the third quarter of 2022 – supported by solid domestic consumption and a pickup in government spending. The unemployment rate declined to 4.68% in the first quarter of 2026, the lowest reading since the fourth quarter of 1997. In response to the rupiah's sustained weakness, Bank Indonesia raised its benchmark rate by 50 basis points to 5.25% at its May 2026 policy meeting – the first hike since April 2024 – adopting a firmly pro-stability stance to anchor inflation amid external uncertainties.
South Korea’s hawkish policy pivot
South Korea (USD Unhedged: -2.9%)
South Korea's 10-year government bond yield rose by approximately 14 basis points in May 2026, while the Korean won detracted 1.6% from returns. Headline inflation accelerated to +3.1% y/y in May 2026 from +2.6% in April 2026, driven by rising transport and food costs, though core inflation held steady at +2.5%. Manufacturing activity strengthened, with the S&P Global PMI survey rising to 54.8 in May 2026 from 53.6 in April 2026 – the highest reading since March 2021 – supported by robust output and new order growth. GDP growth expanded 1.8% quarter on quarter in the first quarter of 2026, the strongest since the same period in 2021, underpinned by a surge in semiconductor exports and recovering investment. The unemployment rate held broadly stable at 2.8% in April 2026. The Bank of Korea maintained its benchmark rate at 2.50% at its May 2026 policy meeting, while adopting a hawkish tilt by raising its 2026 inflation and growth forecasts and signaling potential rate hikes in the coming months.