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.
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.
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.
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.
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.
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.
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'.
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.
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%.
Source: State Street Global Advisors, Bloomberg Finance L.P., Barclays, iBoxx, as of 31 May 2021.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Past performance is not a guarantee of future results.
Diversification does not ensure a profit or guarantee against loss.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's
particular investment objectives, strategies, tax status or investment
horizon. You should consult your tax and financial advisor. All material has
been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State
Street shall have no liability for decisions based on such information.
Index returns are unmanaged and do not reflect the deduction of any fees or
expenses. Index returns reflect all items of income, gain and loss and the
reinvestment of dividends and other income as applicable.
Bonds generally present less short-term risk and volatility than stocks, but
contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from
unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 31 May 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
With Multiple Catalysts on the Horizon, What Lies Ahead for China’s Bond Market?