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Asian Bonds Boosted by a Softer US Growth Path and Rate-Cut Expectations

July 2023 saw most Asian bond markets strengthen as investors eyed a softer US growth trajectory and accelerating rate cuts next year.


SSGA Fixed Income Portfolio Strategists

In July 2023, the Markit iBoxx ABF Pan-Asia Index returned +2.2% on an unhedged basis in US dollar terms and +0.4% on a US dollar hedged basis. Despite the US Federal Reserve (Fed) hiking interest rates, most Asian currencies strengthened against the US dollar. This was driven by market participants factoring in lower US GDP growth and a greater number of interest rate cuts in 2024. Consequently, currency gains were the primary return contributors for the unhedged index. In China, the politburo announced targeted stimulus measures, while Q2 GDP data was significantly lower than expected, supporting local-currency bond prices.

Market Local Currency Bond Return FX Return Total Return (in USD)
Thailand 0.25% 3.73% 3.99%
Malaysia 0.28% 3.32% 3.61%
Korea 0.11% 3.37% 3.49%
China 0.50% 1.49% 2.00%
Singapore 0.02% 1.85% 1.87%
Philippines -0.31% 0.75% 0.44%
Hong Kong -0.23% 0.44% 0.21%
Indonesia 0.87% -0.74% 0.11%

Positive Trade Data and Rate-Hike Expectations Underpin Thailand

Despite political gridlock, Thailand (+3.99%) was the best-performing bond market in July 2023, primarily due to a significant appreciation in the Thai baht. While the US dollar remained weak, the Thai baht rose from its lowest level this year, supported by an improved trade balance and expected interest-rate hike. Local-currency bond yields remained on a rising trend, ending the month near their highest levels of 2023, as headline inflation declined by less than predicted and rate-hike expectations solidified.

Currency Strength Provides a Boost to the Malaysian Market

Malaysian bonds (+3.61%) also posted strong returns in US dollar terms, with gains mainly driven by a stronger Malaysian ringgit. While the Malaysian central bank kept interest rates unchanged, a larger-than-expected trade surplus and more robust economic data (industrial production and manufacturing sales) supported the Malaysian ringgit. Consumer inflation declined as expected, leading bond yields to trade in a narrower range. 

Korea Posts a Healthier Current-Account Balance

Similar to Thailand and Malaysia, South Korea also delivered strong, currency-led returns in July 2023 (+3.49%). An improving current-account balance coupled with broader US dollar weakness were supportive factors for the Korean won. And although interest rates were kept on hold, the Bank of Korea’s assertive policy guidance also supported Korea’s currency. Meanwhile, the central bank’s tone led to a modest increase in medium-term local currency yields, despite lower-than-expected consumer inflation data. 

Yuan Recovery Buoys Chinese Bonds

Chinese bonds rose in July 2023 (+2.0%), primarily due to a turnaround in the Chinese yuan. Local-currency bond yields traded within a range as economic data was mixed. While Q2 GDP growth was far weaker than expected, industrial production was surprisingly positive, while credit growth (new Chinese yuan loans) was also more significant than anticipated. While the July 2023 politburo meeting ended with targeted measures, the lack of broad-based stimulus prevented a sustained rise in bond yields. 

Currency Appreciation Assists the Singapore Market 

Although local-currency bond returns were nearly flat, a 1.85% appreciation in the Singapore dollar resulted in positive US-dollar-denominated returns for Singapore bonds (+1.87%). While Q2 GDP growth produced a marginally positive surprise, economic newsflow, such as retail sales and exports were weaker than market estimates. In line with expectations, Singapore’s core inflation fell, which led to a decline in medium-to-long-dated local-currency bond yields.

Philippine Peso Gains Offset Weak Local-Currency Bond Returns

Philippine bonds posted positive returns (+0.44%) as an appreciating Philippine peso offset declining local-currency bond returns. Local-currency bond yields continued to rise at the start of July 2023 before retreating from their multi-month highs as consumer price inflation was marginally below market expectations. That said, inflation was still well above the Bangko Sentral ng Pilipinas 2%–4% target range, with further rate hikes still possible. 

Hong Kong Mirrors the Fed’s Rate Hike

Hong Kong bonds were modestly positive (+0.21%), with a rise in the Hong Kong dollar offsetting declines in local-currency bond returns. In line with the Fed, the Hong Kong Monetary Authority raised its base rate by 25 bps to 5.75%, propelling the Hong Kong dollar to its most elevated level since December 2022. Local-currency bond yields continued to align with global yields, ending the month at slightly higher levels even as economic data releases were weaker than expected. 

Positive Economic Newsflow Aids Indonesian Bond Yields

Indonesia was the weakest market in July 2023 (+0.1%), with the Indonesian rupiah softening against the US dollar during the month. Medium-term bond yields increased from their lowest levels since the first half of 2022 as economic data, such as Purchasing Managers’ Indices and auto sales, were better than expected. Besides, inflation readings were lower than the market had estimated and within the Bank of Indonesia’s 2%–4% target range. Consequently, the central bank kept interest rates on hold (as predicted) while remaining optimistic about the Indonesian rupiah, which remains one of the best performing Asian currencies in 2023. 

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