Insights

Asian Bond Markets Defy Pandemic Concerns to Post Gains in May

Most Asian bond markets looked through fresh pandemic outbreaks to deliver positive returns in May 2021. Although a resurgence of COVID-19 in some markets and slow vaccination programs in others may restrain the region's recovery, central banks have largely left interest rates and growth forecasts unchanged.

SSGA Fixed Income Portfolio Strategists


Overall, Asia's bond markets posted positive returns in May 2021. The Markit iBoxx ABF Pan-Asia Index rose by +1.07% in US dollar (USD) terms on an unhedged basis and 0.45% on a hedged basis. A resurgence in COVID-19 cases, particularly Malaysia and Thailand, and uneven vaccination programs suggest that Asia's path to recovery could be more fragile than the US and Europe.

Strong fundamentals and inward investment

In China, bond prices rose by 2.48%, with support coming from a stronger renminbi (+1.63%). The currency remains underpinned by a robust economic backdrop, even as the People's Bank of China suggests that it could allow two-way fluctuations (currency appreciation or depreciation). Indeed, China's current account surplus remains a sizeable 2% of gross domestic product (GDP), as the market continues to attract foreign direct investment, particularly into its technology and pharmaceutical industries. Portfolio inflows also lent strength to the renminbi.

Recovery on track

Indonesia's bonds gained 2.12% during the month. Local-currency issues were up 0.99%, while the foreign exchange (FX) element rose by 1.11%. In the wake of its recent policy meeting, Bank of Indonesia noted that the economy is recovering as expected. As such, the 2021 GDP forecast range will remain at 4.1%–5.1%. The central bank also left interest rates unchanged, citing the need to maintain rupiah stability. Markets expect the policy rate to stay at 3.5% throughout 2021. 

Stumbling blocks to progress

In the Philippines, bonds rose by 1.6%, with the local-currency market up by 0.63% and the FX element gaining 0.96%. The market has seen a double whammy of increasing COVID-19 cases and a weak vaccine procurement program. When combined, these factors may present a stumbling block to recovery. In May, the central bank lowered its inflation forecast from 4.2% to 3.9%, which is still in the upper band of its 2-4% target. Market participants also expect it to look past near-term price pressures as it prioritizes support for those households and small-and-medium enterprises (SMEs) hit by the pandemic.

GDP forecast remains intact

Singapore bonds gained +1.48% in May, mainly led by a 1.14% increase in local-currency issues. The Monetary Authority of Singapore (MAS) revealed that, barring a major setback to the global economy, it expects GDP growth to exceed the upper end of its 4–6% forecast range in 2021. Investors believe the MAS will also leave its policy band for the Singapore dollar unchanged at the next policy review in October. In other developments, high-frequency indicators, such as Google's COVID-19 Community Mobility Report, suggest that any decrease in activity has been relatively limited since the government reverted to Phase 2 (Heightened Alert) restrictions on 16 May.

Robust trade tempered by a weaker consumer

Hong Kong's bond markets eked out a modest 0.53% gain over the month, with almost all coming from its local-currency element, which rose by 0.48%. Although imports and exports have displayed strength in the past few months, with overall trade hitting record levels, retail sales have moderated and tourism continues to struggle.

Modest sell-off on the prospect of a return to 'normality'

Korea's bond markets declined by 0.13%, as a 0.24% drop in local-currency bonds offset a 0.12% gain in the FX element. Fixed income sold off, albeit modestly, amid rising inflation, an accelerating vaccine program, and a broadening recovery that is supporting the return to 'normality'.

Hampered by a third wave

Thailand's bond markets were also down, losing 0.13% overall as the FX element weakened by 0.26%. Delays in the tourism sector's recovery, the third wave of COVID-19 cases, and slow vaccination progress have dimmed the market's near-term economic outlook. The Bank of Thailand is widely expected to maintain its policy rate at an all-time low of 0.5% and provide targeted credit and financial support measures.

Movement controls

Malaysia's bonds dipped by 0.60%, as fresh COVID-19 controls saw yields rise and the ringgit weaken by 0.76%. This latest lockdown is in response to a jump in new cases and a slower-than-expected vaccination rollout. Simultaneously, the government announced a 40 billion ringgit stimulus package to provide economic support to hard-hit Malaysians. In another move, the central bank kept its overnight policy rate unchanged at 1.75%.