Asian bond markets rose in July 2022 as investors believed that global central banks would acknowledge slowing growth by moderating the pace of rate hikes.
SSGA Fixed Income Portfolio Strategists
Bond prices in Asia saw a modest recovery in July 2022, with the Markit iBoxx ABF Pan-Asia Index returning +1.34% on an unhedged basis in United States dollar (USD) terms and +1.89% on a USD hedged basis. Indications that future interest-rate rises would reflect the slowing economic backdrop – for example, manufacturing data for emerging Asia was weaker in July – were viewed positively by investors.
Foreign-Exchange (FX) Return
Return (in USD)
Manufacturing Dented by Global Slowdown
Korea (+3.94%) was the best performing market in July, with notable strength in the local-currency segment. Bond prices rose as the global slowdown started to weigh on Korea’s manufacturing sector, with activity contracting for the first time since September 2020.
Exchange-Rate Moves Anticipated in Singapore
Singapore (+2.88) saw bonds recover, in tandem with other developed market bonds, as markets priced in a more benign reaction function from central banks. Markets expect the Monetary Authority of Singapore (MAS) to re-center up its SGD NEER policy band in October, in addition to another 50bp slope increase to an estimated 2.0%. Core inflation momentum continues to remain strong and MAS noted on 19 July that core inflation is projected to increase to a peak of 4.0-4.5% in the third quarter of 2022.
High Commodity Prices Provide Support in Malaysia
Malaysia (+1.53%) saw its bonds rally and the foreign-exchange (FX) segment weaken during the month. Economic data held up reasonably well, with a robust services sector and high commodity prices helping its favorable terms of trade. Early in the month, Bank Negara Malaysia (BNM) continued to normalize economic policy by increasing the overnight policy rate (OPR) by 25 bps to 2.25%. BNM also expects consumer inflation to range between 2.2-3.2%, as price rises have been partially contained by supply-side measures, such as an export ban on poultry.
Recession Bites in Hong Kong
Hong Kong’s (+1.47%) local-currency bonds rose in line with those in the US, from which it imports its monetary policy, while the FX element was flat. GDP growth contracted by 1.4% in the second quarter from a year earlier. This followed a 3.9% decline in the first three months of 2022, thus slipping into recession for the second time in three years. In other news, consumer spending remained under pressure, with retail sales falling by -1.2% in June (from a year ago), which was more than expected.
Interest Rate Hike to Contain Inflation
Philippines (+1.45%) saw its central bank raise interest rates by 75 bps to 3.25%, a level last seen in March 2020. Also, consumer inflation increased 6.4% in July, which heightened expectations for a further 50 bps rate hike in August. Despite these developments, local-currency bonds rallied as the governor of Bangko Sentral ng Pilipinas (BSP) said that inflation may have peaked and second-quarter growth is likely to be around 9%. This gives BSP additional confidence that the economy can sustain tighter monetary policies.
Rupiah Weakness Could Trigger Higher Interest Rates
Indonesia (+0.4%) saw year-on-year headline inflation move slightly higher, from 4.35% in June to 4.94% in July. Core inflation also increased from 2.63% in June to 2.86% in July. While Indonesia’s central bank is comfortable with these numbers, a significant rupiah weakening could pressure policymakers into a sooner-than-expected 25 bps interest-rate hike in September. Elsewhere, foreign investor outflows continued for the fifth consecutive month.
Fiscal Stimulus and Resilient Exports Provide Support
China (0.18%) saw modestly positive returns, with gains in the local-bond segment largely offset by FX weakness. Partial lockdowns in some cities and declining housing activity were balanced by increased fiscal stimulus from infrastructure investment and resilient exports. Market participants expect the amount banks need to hold in reserve will be lowered by 25–50 bps in the second half of 2022 and minimal changes to interest rates.
Current Account Deficit Widens in Thailand
Thailand (-1.76%) experienced currency weakness in July, as the current account deficit widened significantly to US$10.8 billion (around 2.1% of GDP) for the 12 months to end June. This was driven by high commodity prices and still elusive tourist dollars. The Bank of Thailand has previously said it will pursue a liberal FX policy and only intervene to stem excess currency volatility. Meanwhile, local-currency bonds rallied given Thailand's weak growth outlook.
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 July 2022.
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