Insights

Asian Bonds Weaken Amid Concerns About Inflation and Growth

Asian bonds declined as inflationary pressures, hawkish central banks, softer growth, and signs of export weakness dampened investor sentiment

SSGA Fixed Income Portfolio Strategists

2022年9月19日

Asian bond markets experienced weakness in August 2022, with the Markit iBoxx ABF Pan-Asia Index returning -1.58% on an unhedged basis in United States dollar (USD) terms and -0.23% on a USD hedged basis. Investor sentiment was dented by a combination of factors, including softer data from China due to continued power shortages; the determination among central banks to fight inflation, even as the risks to growth increase; and signs of a slowdown in Asia's export sector amid weakening demand from Europe, the US, and China.

Name	Local Currency Bond Return	FX Return	Total Return (in USD)
Korea	-4.06%	-2.87%	-6.82%
Singapore	-1.62%	-1.30%	-2.89%
Hong Kong	-1.95%	0.04%	-1.92%
China	1.08%	-2.30%	-1.24%
Malaysia	0.49%	-0.55%	-0.06%
Philippines	2.48%	-1.73%	0.71%
Indonesia	1.76%	0.06%	1.82%
Thailand	0.85%	0.98%	1.83%

Rising Inflation Weighs on Korean bonds

Korea (-6.82%) was the worst performer in August, led by weakness in its local-currency bonds. Even though the Bank of Korea reverted to more gradual interest rate hikes, increasing its policy rate by only 25 basis points to 2.5%, consumer inflation continued to rise. July saw prices increase by 6.3% year on year compared with 6% the previous month. More importantly, inflation expectations for the next 12 months expanded to 4.7%. Furthermore, slowing export growth due to softer external demand has led to a significant increase in Korea’s trade deficit, which amounted to US$9.5 billion in August. This, in turn, placed pressure on the foreign exchange (FX) segment.

Investors Expect Further Policy Moves in Singapore

Singapore (-2.89%) also performed poorly as market participants felt that further increases in the slope of the exchange-rate policy band might be necessary. This came as core and headline inflation reached multi-year highs across most major categories. Indeed, the average core and headline numbers for 2022 are expected to settle at 4% and 6%, respectively (both at the top of the Monetary Authority of Singapore’s range), necessitating further policy tightening.

Demand Concerns Cloud Hong Kong

Hong Kong (-1.92%) saw its bonds retreat during the month, with the decline driven by weaker local-currency returns – bearing in mind Hong Kong’s monetary policy mirrors that of the aggressive US Federal Reserve (Fed). There were also concerns that weaker demand from other Asian economies would hurt Hong Kong, given its position as a major regional trade hub. That said, price pressures remained subdued compared with other markets, as consumer inflation registered at 1.9% year on year in July compared with 1.8% in June.

COVID Concerns and Power Shortages Trigger Market Weakness

China (-1.24%). The renminbi hit a two-year low as supportive policies aimed at propping up the economy and boosting its property sector exerted pressure on the currency versus the dollar, which is being underpinned by a hawkish Fed. Worries about the disruption to economic activity driven by renewed COVID fears and power shortages led market participants to anticipate that China’s recovery would face challenges.

Economic Activity Improves in Malaysia

Malaysia (-0.06%) experienced modest weakness in the FX segment, but this was offset by healthier local-currency returns. Second-quarter GDP growth beat market expectations, accelerating to 8.9% year on year, with the surge supported by increased activity in the services sector. Furthermore, all key components of the GDP number are now firmly above pre-COVID levels. And even as consumer inflation is expected to move into the 4% territory, Bank Negara Malaysia’s guidance remains firmly in favor of a gradual and measured approach to interest-rate rises, with investors expecting two 25 basis-point hikes before the year’s end.

Central Bank Moderation Expected in the Philippines

Philippines (0.71%) witnessed a rally in its local-currency bonds, as market participants anticipated that the lower-than-expected second-quarter GDP growth number (7.4% year on year versus an expected 8.4%) might lead the central bank to take a more gradual approach to interest-rate normalization. There were concerns that net trade, which was a drag on overall GDP (import growth of +13.6% overshadowed exports at +4.3%), could also widen the current-account gap and prompt peso weakness.

Indonesia’s Central Bank Raises Rates to Tackle Inflation

Indonesia’s (+1.82%) local-currency bonds performed well, despite Bank Indonesia (BI) unexpectedly hiking the 7-day reverse repo rate by 25 basis points to 3.75% towards the end of the month. BI noted that the hike is a pre-emptive step to mitigate the effect of food inflation and potential fuel price hikes. BI also expects GDP to rise, noting that third-quarter growth should surpass the expansion seen in the previous quarter when it was a higher-than-expected 5.4% year on year.

Current-Account Boost from Improving Tourist Numbers

Thailand (+1.83%) saw a modestly positive performance, as investors anticipated a turnaround in its current-account balance on the back of a recovery in the tourism sector. However, risks remain, with Thailand’s monetary policy committee maintaining a gradual stance toward normalization. This was despite pressures from high inflation, which is around 7%. The current-account turnaround may also be at risk from the global slowdown and higher oil prices.

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