Asian bonds slide as the market is unsettled by a combination of rising oil prices, risk-averse investors, soaring inflation, and a strengthening US dollar.
SSGA Fixed Income Portfolio Strategists
Asian bond markets saw negative returns in March 2022, with the Markit iBoxx ABF Pan-Asia Index returning -2% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the index was down by -1.65% on a USD hedged basis. The decline was triggered by a compound of factors, including USD strength, higher oil prices, concerns about runaway inflation, and investor outflows.
|Market||Local-Currency Return||Foreign-Exchange (FX) Return||Return (in USD)|
Thailand (-3.99%) saw a reversal of the previous month’s rally as The Bank of Thailand (BoT) revised its 2022 inflation forecast from 1.7% to 4.9%. The BoT also kept interest rates unchanged at 0.5%, emphasizing that it remained focused on supporting sustained recovery. The central bank also noted that price increases are being underpinned by factors such as higher wages rather than any supply and demand issues in the economy. However, bond prices retreated, as investors sought more attractive returns elsewhere, especially as inflation expectations for Thailand are at their highest since 2008.
Singapore bonds also performed poorly (-3.43%), given a belief that the Monetary Authority of Singapore (MAS) will take further steps to control inflation at its next review in April. This would be the third meeting in a row that the MAS has made such a move. Price rises in the city state are primarily due to global supply-side disruptions and an easing of border controls. Indeed, year-on-year headline inflation was up by 4.3% in February 2022, topping estimates for a 4.2% increase, and is now at its highest since February 2013. Looking ahead and inflation is expected to remain elevated in the near term due to rising import costs that are being spurred by global tensions and COVID lockdowns in China.
In March 2022, Korea (-2.68%) saw underperformance from both the local currency and foreign exchange (FX) segments when headline consumer inflation accelerated to a slightly higher-than-expected 4.1% year-on-year. This placed inflation at its strongest level since 2011, with a sharp increase in retail fuel costs the main driver. The Bank of Korea (BoK), which has an inflation target of 2%, said that price rises in 2022 could be notably higher than its February forecast of 3.1% and are likely to remain at the 4% level for some time. Investors think that the BoK will retain its hawkish stance and raise interest rates three times in 2022, bringing its policy rate to 2% by year-end, as demand and supply-side inflation pressures remain high.
Bond prices in the Philippines retreated over the month (-2.55%) when the Bangko Sentral ng Pilipinas (BSP) raised its 2022 inflation forecast to 4.3%. This was a 60-basis-point increase from its previous estimate. And even though demand-driven price pressures remain low, rising oil and food prices, coupled with a depreciating peso, may increase inflation further. Meanwhile, the BSP made no changes to interest rates at its March meeting, given the central bank’s aim is to support growth. However, it is preparing to reduce the scale of its economic support programs as these too may trigger inflation.
Hong Kong (-2.23%) saw declines in the local currency and FX segments as private-sector economic activity contracted further during the month. This came amid lockdowns in China that added more pressure on businesses. In financial news, a headline measure of economic activity for March month dipped to levels not seen since April 2020. Also, retail sales in February 2022 plunged by 14.6%, their sharpest fall in 19 months, when stringent social-distancing curbs were introduced to address the city’s fifth wave of COVID-19. And given Hong Kong imports its monetary policy from the US due to a linked exchange rate, it is forced to raise borrowing costs when the US Federal Reserve (Fed) hikes interest rates.
In Malaysia (-1.2%), the local-currency element sold off as Bank Negara Malaysia (BNM) appeared to hint repeatedly at the need to begin ‘normalizing’ its monetary policy, given an expectation that the economy’s actual output growth rate of 5.3%– 6.3% is projected to outpace its potential output growth of 3%–4%. While price pressures remain moderate for now and are mainly supply-driven, they may begin to increase as domestic demand recovers. In another development, BNM raised its headline consumer inflation forecast from 2%–3% to 2.2%–3.2%.
For Indonesia (-0.75%), the local-currency segment saw weakness while FX remained flat, as foreign-investor holdings in Indonesian bonds fell sharply in March. The month saw a reduction of IDR48.3 trillion, the biggest monthly decline in two years. This move reflected a drop in investors’ appetite for risk as the Fed started to increase interest rates. More broadly, enthusiasm for emerging-market investments also waned. Meanwhile, even as year-on-year headline consumer inflation jumped to 2.64% in March 2022(from 2.06% in February 2022), it remains in the lower half of Bank Indonesia's 2%–4% target range.
Although it ended the month in negative territory, China (-0.48%) was the most robust market in March 2022. This was chiefly due to the Chinese renminbi’s position as a managed currency that tends to outperform other emerging-market currencies when global risk aversion intensifies. However, the outlook for China remains uncertain, as renewed COVID lockdowns are already weighing on economic growth momentum, and more provincial-level lockdowns will affect consumption and services. A narrowing of the gap between the interest rates offered by China bonds compared to those in the US, as well as higher-than-expected bond valuations, have fueled capital outflows, with foreign investors selling USD5.5 billion of government bonds in February, marking the most significant monthly decline on record and the first reduction since March 2021.
Source: State Street Global Advisors for commentary, Bloomberg Finance L.P. for economic data, IHS Markit for Markit iBoxx ABF Pan-Asia Index data, and return data showing in the performance table, as of 31 March 2022.
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