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Asian Bond Yields Slide Amid US Rate-Cut Expectations

Asian bonds rose and yields fell in November 2023, as disappointing US economic news led investors to anticipate more extensive rate cuts in 2024.


SSGA Fixed Income Portfolio Strategists

In November 2023, the Markit iBoxx ABF Pan-Asia Index returned +5.09% on an unhedged basis in US-dollar terms. This was the third strongest monthly return since the index's inception, taking its year-to-date performance into positive territory. On a US-dollar-hedged basis (which excludes currency impacts), the Index returned +2.65% over the month.

Local-currency bond returns were positive, as long-term benchmark bond yields in the eight Asian markets within the index declined by an average of 37 basis points (bps) in November 2023. A strengthening of Asian currencies against the US dollar was also a major contributor to the positive return of the unhedged index.

On aggregate, economic data across Asia aligned with expectations, led by China. However, economic surprises were negative in the United States, while consumer inflation was below expectations, leading market participants to anticipate five US Federal Reserve (Fed) interest-rate cuts in 2024 versus the three predicted at the start of November 2023 (based on fed-funds futures market pricing). Consequently, the US dollar weakened. Global government bond yields also declined, as economic surprises were worse than expected on aggregate.

Market Local Currency Bond Return FX Return Total Return (in USD)
South Korea 4.6% 4.7% 9.5%
Philippines 5.0% 2.3%
Indonesia 2.6% 2.4% 5.1%
Singapore 2.5% 2.5% 5.0%
Thailand 2.2% 2.5% 4.7%
Malaysia 2.0% 2.2% 4.2%
China 0.5% 2.6% 3.2%
Hong Kong 2.6% 0.2% 2.8%

Slowing Economic Data Triggers a Decline in Korean Bond Yields

South Korea (+9.5%) saw its long-term bond yields fall by 22 bps, contributing to a positive local currency return of 4.6%. Meanwhile, the Korean won was the best-performing currency among the counties in the index, rallying by 4.7%. Korea’s trade surplus was positive and better than expected which supported the Korean won. Headline economic data, including retail sales and industrial production, indicated a slowdown and precipitated the decline in local-currency bond yields. While the Bank of Korea kept interest rates unchanged, the market expects an interest rate cut in the second quarter of 2024.

Softer Inflation in the Philippines

Philippines (+7.4%) also saw its long-term bond yields fall in November 2023 (by 75 bps). This was the most significant decline among the eight Asian markets in the index, making the Philippines the best-performing territory in local-currency terms. The Philippine peso appreciated by 2.3%, further adding to US-dollar-denominated returns. While GDP growth data for the third quarter of 2023 was better than expected, consumer inflation readings were unexpectedly soft, thereby supporting bond prices. After hiking rates in October 2023, the Bangko Sentral ng Pilipinas kept borrowing costs unchanged, as expected, citing the potential for higher inflation.

Supported by Improving Data and US-Dollar Weakness

Indonesia’s (+5.1%) long-term bond yields declined by 48 bps, leading to positive local-currency bond returns. Meanwhile, the Indonesian rupiah was underpinned by broad-based US dollar weakness. Further support for the rupiah came from consumer inflation readings and GDP growth data that were in line with market expectations, as well as improving trade and current account balances. Bank Indonesia kept policy rates unchanged after a surprise hike in October 2023, and market participants now expect the Indonesian central bank to maintain interest rates at current levels throughout the first half of 2024.

Monetary Policy Remains Tight in Singapore

Singapore (+5.0%) experienced declining long-term yields, which fell by a significant 42 bps in November 2023. In turn, this led to positive local-currency bond returns. At the same time, an appreciating Singapore dollar further improved US-dollar-denominated returns. Economic data releases were mixed with unexpectedly weak retail sales and firmer-than-expected consumer inflation – unlike the US, where inflation surprisingly fell. The Managing Director of the Monetary Authority of Singapore observed that monetary policy remains ‘appropriately tight’, while the Singapore dollar’s gains, derived from the trade-weighted exchange rate mechanism, should also keep inflation within the expected range.

Bond Yields Slide in Thailand

Thailand’s (+4.7%) long-term bond yields slipped by 26 bps, which boosted local-currency returns. Meanwhile, the broad-based decline in the US dollar provided a tailwind to the Thai baht, aiding returns in US-dollar terms. Although core inflation readings were as predicted, headline consumer inflation data indicated declining prices. Elsewhere, GDP growth data was below expectations. At its policy review meeting, the Bank of Thailand kept interest rates unchanged but reduced its growth forecasts for 2023 and 2024, leading market participants to anticipate the start of a rate-cutting cycle in the second half of 2024.

Constructive Outlook for Malaysia

Malaysia (+4.2%) experienced a relatively slender 25 bp fall in its 10-year government bond yield, while the Malaysian ringgit appreciated in line with Asian peers leading to positive local-currency and US-dollar-denominated returns. At its policy meeting at the start of November 2023, the Bank Negara Malaysia kept interest rates unchanged with a neutral stance. The central bank stated a constructive outlook for 2024 driven by resilient domestic consumption, a recovery in electronic exports, and improving tourism. It also noted that risks could be posed by weak external demand and softer commodity production. Market participants now expect interest rates to remain unchanged in 2024.

Currency Appreciation and Policy Support in China

China’s (+3.2%) long-term bond yields remained decoupled from the rest of Asian and other global economies, remaining broadly unchanged in November 2023. Notably, the Chinese yuan saw its first monthly rise against the US dollar in four months on expectations of more favourable interest-rate differential between China and the US. Unlike the US, economic data releases mostly aligned with market expectations. Although consumer inflation data showed a marginally larger-than-expected decline, industrial production and retail sales data were surprisingly healthy. As expected, the People’s Bank of China kept key interest rates unchanged, although it injected fresh liquidity into the financial system to prevent a spike in borrowing costs. In addition, news of potential financing support for fifty major real-estate firms supported investor risk appetite and led to a modest intra-month increase in government bond yields.

Mixed Economic Data and Modest Currency Gains in Hong Kong

Hong Kong’s (+2.8%) local-currency bond returns remained positive as long-term yields declined by 59 bps. However, the Hong Kong dollar, which is pegged to the US dollar, only saw a modest 0.2% rise versus the greenback and underperformed other Asian currencies. Economic data releases remained mixed, with surprisingly positive consumer inflation data and weaker-than-expected retail sales. At its policy meeting in early November 2023, the Hong Kong Monetary Authority noted that the high interest-rate environment is expected to remain in place for some time.

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