Insights

Asian Bonds Slide Amid Fed Hikes and UK Gilt Tensions

Asian bond markets retreated as investors faced an increasingly hawkish Fed, gilt market tensions, rising Treasury yields, and weakness in China.


SSGA Fixed Income Portfolio Strategists


Asian bond markets retreated in September 2022, with the Markit iBoxx ABF Pan-Asia Index returning -5.27% on an unhedged basis in United States dollar (USD) terms and -1.92% on a USD hedged basis.

Investors were unsettled by a more hawkish stance at the US Federal Reserve’s (Fed) September policy meeting. Further uncertainty came from the surprisingly expansive fiscal plans presented by the new UK government, which triggered an adverse reaction in the gilt market. In turn, this prompted the Bank of England to intervene with an emergency bond-buying program.

Market weakness was also driven by rising US Treasury yields, investors seeking safe havens, and a strengthening US dollar.

Meanwhile, Asian economies faced challenges of their own, with slowing export demand from developed markets, increasing trade deficits, and a muted recovery in China.

More broadly, fears about gas-supply shortages in Europe impacted bond prices too.

Market Local-Currency Return Foreign-Exchange (FX) Return Return (in USD)
Korea -2.38% -6.51% -8.73%
Philippines -4.00% -4.16% -7.99%
Thailand -3.36% -3.59% -6.83%
Malaysia -2.75% -3.48% -6.13%
Singapore -2.95% -2.50% -5.37%
Indonesia -0.88% -2.55% -3.41%
China -0.24% -2.78% -3.02%
Hong Kong -2.18% -0.03% -2.21%

Trade Deficit and Interest-Rate Concerns in Korea

Korea (-8.73%) remained the worst-performing market for a second month. This was driven mainly by weakness in the foreign-exchange (FX) segment, which was dented by Korea’s expanding trade deficit. Further pressure came from the central bank’s decision to move counter to the Fed and slow the pace of interest-rate rises. Consequently, market participants now expect the Bank of Korea to raise the policy rate by 50 basis points (bps) at its October meeting. In other developments, headline inflation declined to 5.6% year on year in September (5.7% in August), while the core measure was slightly higher at 4.5% year on year (4.4% in August). These numbers suggested that demand was still outstripping supply, despite interest-rate rises that began in August 2021.

Higher-Then-Expected Rate Hike Surprises Investors

Philippines (-7.99%) also struggled during the month, with the FX element and local-currency bonds underperforming. The Philippines' current-account position has been deteriorating, widening to a record deficit of USD5.9 billion, which has impacted the peso. The Bangko Sentral ng Pilipinas (BSP) hiked interest rates by 50 bps at its September policy meeting. This surprised the market, given earlier comments that the BSP would revert to 25 bp hikes. Meanwhile, continued increases in food prices, strong demand, and a minimum-wage uplift meant that headline and core inflation breached the BSP's target range of 2–4%. As a result, the central bank may be forced to increase interest rates by a larger magnitude.

Current Account Challenges Cloud a Recovery in Tourism

Thailand (-6.83%) declined in September, with any upside from a recovery in tourism overshadowed by a stubbornly wide current-account deficit. The pace of Fed interest-rate rises also had a negative impact on Thailand’s bonds and FX. September saw the Bank of Thailand hike its policy rate by 25 bps to 1% and acknowledge that it had been intervening in the FX markets to curb excessive moves. It also noted that demand-side price pressures remained limited.

Stubborn Consumer Inflation in Malaysia

Malaysia (-6.13%) saw consumer inflation continue to surge (headline: 4.7% year on year in August, from 4.4% in July; and core: 3.8% year on year in August, from 3.4% in July). The opening of the economy and a revival in domestic activity has contributed to a rise in discretionary spending, with demand outstripping supply. At its policy meeting in early September, Bank Negara Malaysia delivered a third consecutive interest-rate hike (25 bps) for only the second time since 2010. It also signaled that future increases would be data dependent, given rising global challenges.

Policy Changes Anticipated in Singapore

Singapore (-5.37%) performed poorly as market participants felt that further increases in the slope of the exchange-rate policy band would be necessary at the Monetary Authority of Singapore’s October meeting. This belief was underpinned by rising core and headline inflation, which reached fresh multi-year highs in August (core: 4.8% in July to 5.1% in August, headline: 7% in July to 7.5% in August). Price increases in Singapore were triggered mainly by higher food and services costs, as well as ongoing labor-market tightness.

Front-Loaded Interest Rate Hike Reassures Investors

Indonesia (-3.41%) was more robust than other Asian markets, as investors reacted positively to Bank Indonesia’s larger-than-expected 50 bps interest rate hike. The central bank noted that a more significant increase was needed to stabilize the rupiah amid rising global pressures. It also said the decision was a forward-looking measure aimed at lowering inflation expectations. Indonesia’s GDP growth forecast remained unchanged, sitting at the top half of the 4.5–5.3% range, supported by improving domestic demand amid still-solid exports.

Currency Weakness and Subdued Economic Activity

China (-3.02%) saw its currency hit a fresh 28-month low in September. The ever-widening interest-rate gap between other developed markets and China bonds weakened the renminbi for a seventh straight month. A month-on-month measure of non-manufacturing activity grew at a slower pace in September, indicating that the world's second-largest economy remained under pressure.

Fed Mirroring Impacts Local-Currency Returns

Hong Kong (-2.21%) experienced relatively mild underperformance, which came from weak local-currency returns, given that Hong Kong raises rates in lockstep with the aggressive Fed. There were also concerns that slowing demand from other Asian economies would hurt Hong Kong, a major regional trade hub. Price pressures remained notably subdued compared to other markets, with consumer inflation unchanged at 1.9% year on year in August, slightly below market expectations.


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