Caution in Asian bond markets as investors eye rising inflation and a COVID-driven slowdown in China.
SSGA Fixed Income Portfolio Strategists
Overall, Asian bond markets delivered a small positive return in May 2022. The Markit iBoxx ABF Pan-Asia Index returned +0.15% on an unhedged basis in United States dollar (USD) terms, while it was up +0.11% on a USD hedged basis. The region’s central banks remained focused on inflation while keeping an eye on the potential economic impact of lockdowns in China.
Foreign-Exchange (FX) Return
Return (in USD)
Interest Rate Rise in Korea as Central Bank Targets Inflation
In Korea (+1.6%), the central bank raised interest rates by 25 basis points (bps) to 1.75% at the May policy meeting. Following its decision, the Bank of Korea’s governor indicated that the market’s interest-rate expectations of 2.25-2.5% by year end was in line with the bank's, given its focus on tackling inflation. Local-currency bonds were mostly flat as the rate rise had already been priced in. However, the foreign-exchange (FX) element strengthened on a slightly more positive outlook for the economy, given improvements in the services sector driven by a relaxation of social-distancing measures.
Underlying Economic Strength Buoys the Malaysian Market
Malaysia (+1.5%) saw local-currency bonds reverse part of last month’s losses as Bank Negara Malaysia raised interest rates by 0.25%. Explaining its decision, the central bank cited ongoing strength in the domestic economy and reassured markets that its return to more ‘normal’ monetary policies would be measured and gradual. Also, the unwinding of COVID-related restrictions, a strong labor market, improved income prospects, and favorable terms of trade in the agricultural sector mean the economy should be able to cope with any unexpected events.
Positive Bond Returns in Hong Kong Mirror a Similar Rise in the US
In Hong Kong (+0.63%), local-currency bonds saw modest strength, which was in line with bond performance in the US, whose monetary policy Hong Kong mirrors. Meanwhile, the FX element was flat. The government downgraded Hong Kong’s growth forecasts for 2022 to 1%–2% (previously 2%–3.5%), noting that even as its fifth COVID wave slowly eases, the economy remains under pressure due to weak consumer spending, a lack of tourism, and a separate COVID outbreak in mainland China, which has disrupted trade.
Growth Caution and Rising Inflation in Singapore
Singapore (0.03%) was essentially flat, with local-currency bond returns and the FX segment offsetting each other. In its latest economic survey, the Ministry of Trade and Industry (MTI) left the official 2022 gross domestic product (GDP) growth forecast unchanged at 3%–5%, noting that growth would likely be in the lower half of the range. Driven by higher food and utility costs, Singapore's core inflation rose to 3.3% in April, the fastest pace in a decade. However, MTI believes it will peak at 4% in the third quarter of 2022 before moderating later in the year. Market participants also expect the Monetary Authority of Singapore to tighten FX policy settings at its October meeting.
China Experiences Subdued Consumption and Rising Unemployment
Meanwhile, in China (-0.15%), the COVID situation improved, but economic activity remained still below pre-Shanghai lockdown levels, and China’s GDP growth forecasts for 2022 saw further downgrades: the market now believes the economy will expand by 4.7% year on year (from 5% in April). Retail sales and services consumption remained subdued, and unemployment saw a surge in April. Furthermore, analysts believe that the amount of money banks must keep in reserve will be cut by 25 bps–50 bps in the second half of 2022. They also do not think the People’s Bank of China will cut interest rates but instead focus on lending to small and medium-sized enterprises (SMEs), the housing market, and infrastructure projects. China’s FX element has been weaker due to outflows from overseas bond investors, plus some of the advantages of holding higher-yielding Chinese bonds have disappeared.
Stronger-Than-Expected Growth in Thailand
Thailand (-0.20%) saw year-on-year consumer price inflation slow to 4.65% in April (5.73% in March). However, this is still above the Bank of Thailand’s (BoT) target range and is expected to remain high due to persistent price pressures in energy and food. Conversely, inflation driven by demand in the economy remains mild, so the BoT isn’t expected to raise interest rates just yet. In other news, year-on-year GDP for the first quarter of 2022 rose by 2.2% (1.8% in the fourth quarter of 2021). This was higher than the 1.7% growth expected by the market. The BoT believes that full-year growth will be 3.2%, given a boost from the tourism sector – one of the primary drivers of Thailand’s economy is starting to recover, as on-arrival COVID tests have been scrapped.
Indonesian Bank Liquidity in Focus
In Indonesia (-0.95%), the central bank left interest rates unchanged at 3.5%, which was in line with market estimates, and announced an increase in the amount of money banks must hold in reserve (up to 9% by September from 6.5% previously). The latter move should absorb IDR110 trillion in liquidity. Bank Indonesia (BI) Governor Perry Warjiyo acknowledged that even though he expects a total of 250 bps in rate hikes by the US Federal Reserve this year, followed by another 50 bps of increases in 2023, the bank won’t immediately raise its policy rate, preferring to normalise liquidity conditions first. This news led to a slight weakening in local-currency bonds and the FX segment.
Unexpected Rate Rise in the Philippines
Philippines (-2.94%) saw local-currency bonds underperform as Bangko Sentral ng Pilipinas (BSP) hiked the overnight borrowing rate to 2.25% at its May meeting. The move was somewhat unexpected, as market participants believed that the BSP would be prepared to tolerate higher inflation for a few more months. BSP expects inflation to rise by 4.6% in 2022, an increase of 30 bps from its March forecast. This estimate rests on an average crude oil price of USD100 a barrel. The central bank also stated that its ability to support the economy has considerably narrowed.
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 May 2022.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance.
Diversification does not ensure a profit or guarantee against loss.
Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 31 May 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.