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Asian Bond Yields Rangebound as US Dollar Strengthens

Robust US economic data saw the market revise its rate-cut forecast lower. In turn, the US dollar rose, with narrow Asian yield movement.


SSGA Fixed Income Portfolio Strategists

Asian bond yields moved in a narrow range in March 2024, with the Markit iBoxx ABF Pan-Asia Index returning +0.6% on a US-dollar-hedged basis and -0.1% in US-dollar-unhedged terms. In the first quarter of 2024, the index returned +1.1% on a US-dollar-hedged basis, while Asian currencies, on aggregate, declined by -3.3%, leading to a -2.2% performance in US-dollar-unhedged terms.

Asian 10-year yields, on average, declined by three basis points in March but increased by an average of 16 basis points in the first quarter of 2024. Although yield movements were relatively muted in March, a significant divergence was seen across Asian markets during the first three months of the year. China's 10-year yield declined by a substantial 27 basis points to a multi-decade low, while Hong Kong and Singapore saw 10-year yields rise by 48 basis points and 40 basis points, respectively. This meant they remained above the 90th percentile of their historical ranges.

Currency movements remained a key driver of returns for the unhedged index during the first quarter of 2024. Asian currencies saw a significant decline against the US dollar driven by relatively weaker-than-anticipated data and persistent housing-sector weakness in China. Meanwhile, we saw relatively stronger-than-expected economic newsflow in the United States. Market consensus scaled back US interest-rate-cut predictions for the first half of 2024 from three at the start of the year to under one. Consequently, the US dollar strengthened, and unhedged currency returns remained negative for the quarter.

Market Local Currency Bond Return FX Return Total Return (in USD)
Malaysia 0.5% 0.6% 1.1%
Philippines 0.6% 0.0% 0.6%
Hong Kong 0.4% 0.0% 0.4%
South Korea 1.0% -1.1% -0.1%
Singapore 0.2% -0.4% -0.2%
China 0.1% -0.5% -0.4%
Indonesia 0.3% -0.9% -0.6%
Thailand 0.5% -1.7% -1.2%

Long-Term Bond Yields Static in Malaysia

Malaysia (+1.1%) was the best-performing market in the Markit iBoxx ABF Pan-Asia Index, rising by +1.1% in US-dollar terms and +0.5% in Malaysian-ringgit terms. Long-term bond yields were unchanged over the month, with positive income returns and a modest appreciation in the Malaysian ringgit, aiding returns in unhedged terms. Economic data was mixed with consumer inflation remaining firmer than expected. At its policy meeting, the Bank Negara Malaysia kept its overnight policy rates unchanged, expecting growth to improve in 2024 and inflation to stay stable. The central bank noted that the Malaysian ringgit remains undervalued and said it was coordinating with state-linked firms to repatriate foreign income to support the ringgit.

Robust Inflation and a Narrower Trade Deficit

Philippines (+0.6%) posted positive US-dollar-denominated and Philippine peso returns of +0.6%. The long-term 10-year yield decreased by three basis points in March 2024. Consumer inflation data for February 2024 was surprisingly strong, while the trade deficit was smaller than predicted, driven by weaker-than-expected import data. Market participants expect the Bangko Sentral ng Pilipinas to keep interest rates on hold in the near term, although rate cuts are expected in the second half of 2024.

Weaker-Than-Anticipated Economic Data in Hong Kong

Hong Kong (+0.4%) registered US-dollar-denominated and Hong Kong-dollar returns of +0.4%, as the 10-year yield declined by 10 basis points in March 2024, with positive price and income returns. Economic data releases, such as retail sales, the trade balance, and consumer prices, were weaker than expected. In line with the US Federal Reserve (Fed), the Hong Kong Monetary Authority (HKMA) kept interest rates unchanged at its policy meeting in March 2024 while expecting interbank rates to remain high for some time, given uncertainty around the timing of Fed rate cuts. The HKMA also urged lenders and borrowers to remain cautious of interest-rate risks after a spike in property deals following certain relaxations on home purchases.

Decline in the South Korean Won

South Korea (-0.1%) recorded a modestly negative return in US-dollar-denominated terms, with a positive local currency return of +1%. However, a -1.1% decline in the Korean won resulted in a negative return in unhedged currency terms. Although import data has been weaker than expected, overall economic data releases, including retail sales and industrial production, remained resilient. Consumer inflation for February 2024 and March 2024 marginally surprised the market by moving higher. Meanwhile, the minutes of the Bank of Korea’s (BoK) February 2024 policy meeting showed most board members believed it was too early to start a rate-cutting cycle. Market participants expect the BoK to trim rates in the third quarter of 2024.

No Changes to Monetary Policy Expected in Singapore

Singapore (-0.2%) saw a modestly negative return in unhedged US-dollar terms, as a decline in the Singapore dollar offset positive local currency returns. Economic data releases remained mixed, with weaker February 2024 retail sales balanced by better industrial production, and the 10-year yield was mostly unchanged. However, consumer inflation for February 2024 was unexpectedly strong, and market participants expect the Monetary Authority of Singapore to keep its policy unchanged in the short term, with policy normalisation expected to begin in the second half of 2024.

Marginal Decline in China’s 10-Year Bond Yield

China (-0.4%) also registered a negative return in unhedged US-dollar terms in March, driven by a -0.5% decline in the Chinese yuan – the US dollar-Chinese yuan (CNY) exchange rate settled above 7.2 at the end of March 2024. The long-term 10-year yield saw a marginal decline of six basis points in March 2024, remaining close to a multi-decade low as market consensus continues to expect further monetary easing measures, especially in the reserve requirement ratio (the amount of money banks are required to keep in reserve). However, on aggregate, economic data releases were slightly better than expected in March 2024. Purchasing Managers’ Index (PMI) surveys, trade data, and industrial production were better than expected, while consumer inflation data also rose after declining for four consecutive months (prior to February 2024). The People’s Bank of China (PBoC) left interest rates unchanged in March 2024. However, CNY 94 billion of liquidity was withdrawn from the banking system, the first net withdrawal since November 2022, with the PBoC reiterating its commitment to a stable yuan.

Resilient Economic Data in Indonesia

Indonesia (-0.6%) delivered negative US-dollar-denominated returns in March 2024, driven by a -0.9% decline in the Indonesian rupiah. The 10-year yield rose by 10 basis points in March 2024 as economic data releases, such as PMI surveys, auto sales, and imports, remained resilient. However, consumer inflation data for February 2024 and March 2024 was surprisingly strong. Bank Indonesia (BI) kept interest rates unchanged for a fifth consecutive meeting, which aligned with market expectations. That said, a rate cut is expected in the second half of 2024 after the US Fed pivots towards rate reductions. Notably, BI intervened in the currency market as significant foreign outflows were seen from Indonesian bonds in the first quarter of 2024.

Notable Decline in the Thai Baht

Thailand (-1.2%) saw the lowest returns in US-dollar-denominated terms in the Markit iBoxx Pan Asia index, mainly driven by a significant -1.7% decline in the Thai baht. The 10-year yield declined by a modest five basis points during the month as economic data releases such as PMI surveys and car sales indicated subdued economic momentum. A more significant trade deficit in the month was also a headwind to the Thai baht, while consumer prices fell for a sixth consecutive month. Notably, the World Bank cut Thailand's 2024 gross domestic product (GDP) projections from +3.2% to +2.8%, prompted by a slowdown in global trade, delayed government spending, and weaker public investments.

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