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Asian Bonds Supported by Easing Inflationary Pressures

Asian bonds rose in January as investors reacted positively to easing inflation, the anticipated boost from China’s reopening and hopes that the global economy would avoid recession.

SSGA Fixed Income Portfolio Strategists


January saw Asia bond markets rally for the third consecutive month, with the Markit iBoxx ABF Pan-Asia Index returning +4.43% on an unhedged basis in United States dollar (USD) terms and +1.73% on a USD hedged basis. The optimistic tone came amid steadily decreasing inflationary pressures, which investors hope will prompt the end of US Federal Reserve (Fed) interest-rate hikes in the second quarter of 2023. The market was also buoyed by the increased possibility of a soft landing for the global economy, positive surprises in the European Union’s growth outlook, and the tailwinds from China’s reopening.

Market Local Currency Bond Return FX Return Return (in USD)
Philippines 4.97% 2.01% 7.08%
Thailand 1.60% 5.28% 6.96%
Korea 3.67% 2.65% 6.42%
Malaysia 2.29% 3.60% 5.97%
Indonesia 1.34% 3.85% 5.25%
China -0.11% 2.98% 2.86%
Singapore 0.01% 2.21% 2.22%
Hong Kong 2.23% -0.54% 1.68%

Peso Strength but Inflation Remains Stubborn

Philippine (+7.08%) assets have enjoyed strong performance in recent months. In particular, the peso rose on the back of USD weakness and large interest-rate hikes by the Bangko Sentral ng Pilipinas (BSP) that matched those delivered by the Fed. However, consumer inflation has been surprisingly high, rising by 8.7% year on year in January from 8.1% in December. This breached the BSP’s forecast range of 7.5%-8.3%. Market participants believe that inflation will not return to the central bank’s target zone until the second half of 2023 and, as such, the possibility that February’s interest-rate hike will exceed 25 basis points (bps) has increased.

Central Bank Caution as Tourism Recovers in Thailand

Thailand’s (+6.96%) local-currency bonds and the baht continued to recover in January. The easing of COVID restrictions in China has prompted a rise in visitor numbers, which aided a broad-based recovery in Thailand’s labor market. Both headline and core inflation slowed in January to 5.02% and 3.04% year on year, respectively. In a unanimous decision, the Bank of Thailand hiked its policy rate by 25 bps to 1.5% in January. The central bank also adopted a hawkish tone, with market participants expecting a further 25 bp hike at the March policy meeting, taking interest rates to 1.75% – this is despite soft inflation. However, the Bank of Thailand will want to avoid a scenario where prices rise because supply is unable to meet demand as tourism recovers.

Hopes for a Boost to Korean Exports

Korea (6.42%) saw positive returns amid improving economic sentiment and China’s reopening process, which is expected to benefit regional export-reliant economies like Korea. Furthermore, foreign investors are also likely to return as attitudes towards emerging markets improve. The Bank of Korea (BoK) delivered a 25 bp interest-rate hike at its January policy meeting – possibly marking the end of rate rises for now. With growth slowing and consumer inflation expected to slip below 5% by March, it is predicted that the BoK will shift its focus from inflation to balancing growth and financial stability.

No Change to Malaysia’s Policy Rate

Malaysia (+5.97%) performed well, too, as the Bank Negara Malaysia surprised investors by maintaining interest rates at 2.75%. The market had predicted a further 25 bp hike. Headline inflation had peaked in Q3 2022 and is expected to moderate but remain elevated into 2023. The central bank thinks that growth for 2022 will exceed its 6.5%-7% target but said that softer growth is anticipated in 2023 given the global slowdown.

Central Bank Action Provide Support in Indonesia

Indonesia (+5.25%) was boosted by a rise in the value of the rupiah, which was driven by the positive market tone and Bank of Indonesia’s direct intervention in the foreign- exchange market. Meanwhile, in January, foreign-investor purchases of Indonesian government bonds were the strongest in years, with holdings up by IDR49.7 trillion (Source: Barclays). Also, the market was surprised when headline inflation moderated to 5.28% year on year. This should enable investors to expect no further rate hikes in 2023.

Reopening Gathers Pace in China

In China (+2.86%), the yuan's value has risen by 3% since the start of the year as the economy reopened. In the first half of January alone, net overseas investment in China's stocks and bonds hit US$12.6 billion, with market participants believing that the economic recovery could be a major hedge against any global downturn. In other developments, the International Monetary Fund (IMF) lifted its 2023 growth forecast for China to 5.2% from a previous prediction of 4.4%.

Hopes for an End to Policy Tightening in Singapore

Singapore (2.22%) enjoyed currency strength in January, with the Singapore dollar touching a five-year high, helped by rising expectations that the Monetary Authority of Singapore (MAS) would refrain from further policy tightening this year: MAS adjusted its foreign-exchange-based monetary policy four times in 2022 to fight rampant inflationary pressures. The market tone was also helped by China’s reopening, which should support Singapore's exports, as well as a reduction in domestic economic risk.

The Prospect of Interest-Rate Stability and Increased Tourism Lifts Hong Kong

Hong Kong (+1.68%) bonds rose in January on expectations that the current cycle of rising interest rates could be near an end. The Hong Kong Monetary Authority (HKMA) is expected to hike its base rate by 25 bps to 5% at the start of February, following a Fed rate hike of the same margin. Also, border reopening with mainland China is predicted to boost 2023 growth, bolster consumer sentiment, underpin the services sector, and support trade, albeit gradually. Prior to the pandemic, tourists accounted for around 30%-40% of retail sales in Hong Kong, with visitors from mainland China representing about 80% of this figure.