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Asian Bonds Rise as China Reopens and Rate Hikes Ease

Asian bond markets were lifted by China’s unexpectedly swift reopening, dollar weakness, and the prospect of less aggressive interest-rate hikes.

SSGA Fixed Income Portfolio Strategists

Asian bond markets extended their rally in December 2022, with the Markit iBoxx ABF Pan-Asia Index returning +3.23% on an unhedged basis in United States dollar (USD) terms and +1.14% on a USD hedged basis.

A surprise weakening in US consumer inflation was offset by moderately aggressive interest rate hikes by the US Federal Reserve (Fed) and the European Central Bank, as well as the Bank of Japan’s unexpected decision to normalize its monetary policy. And in the currency market, the US dollar Index (DXY) declined by a further -2.3%.

Elsewhere, a faster-than-anticipated reopening in China triggered a surge in domestic COVID-19 cases, leading to near-term disruption in the manufacturing and services sectors. It remains to be seen how the situation will evolve over the Chinese New Year holiday.

Market Local Currency Bond Return FX Return Return (in USD)
Korea 0.53% 4.30% 4.85%
Thailand 2.10% 2.11% 4.26%
Singapore 1.36% 2.05% 3.44%
China 0.52% 2.70% 3.23%
Philippines 1.65% 1.49% 3.17%
Malaysia 1.18% 1.43% 2.62%
Indonesia 0.99% 1.05% 2.05%
Hong Kong 0.74% 0.08% 0.81%

Improving Sentiment and China Reopening
Korea (+4.85%) saw almost all its positive returns emanate from the foreign-exchange (FX) component, which has staged a sharp rebound in the last two months. This came amid improving global economic sentiment and China’s reopening process, which is expected to benefit regional export-reliant economies like Korea. Consumer inflation continued to increase in December, with headline prices rising by 5% year on year (YoY). Core inflation was also persistent, gaining 4.8% YoY. Market participants believe the Bank of Korea will announce a further rate hike at its January meeting, raising the cost of borrowing to 3.5%. The central bank is then expected to pause and assess the potential downside risks to growth from its unwaveringly aggressive stance adopted in recent months.

Hopes of a Tourism Recovery Lifts Sentiment 
In Thailand (+4.26%), local-currency bonds and the baht continued their recovery in December. After the easing of COVID restrictions in China, Thailand expects around five million Chinese visitor arrivals in 2023. This would further boost the economy and its vital tourism sector, which has been steadily recovering ever since the start of 2022. However, headline inflation remained high at 5.89% YoY in December, compared to +5.55% in the previous month. Investors expect the Bank of Thailand to announce a 25-basis point (bp) interest-rate hike at its January meeting. It may also embark on a gradual hiking cycle based on the evolving growth outlook, with a 25 bp increase in March and similar increases at subsequent meetings.

Policy Tightening Could Ease in Singapore
Singapore (+3.44%) delivered an assured performance in December. Furthermore, the Singapore dollar was the only Asian currency to register a positive return against the USD in 2022. Preliminary data from the Ministry of Trade and Industry showed that Singapore's economy had expanded by 3.8% in 2022, exceeding the government's forecast of 3.5%. Recent data also revealed that core and headline inflation were unchanged at 5.1% and 6.7% YoY in November. The case remains for the Monetary Authority of Singapore to refrain from further policy tightening in 2023 after amending its foreign exchange-based monetary policy four times in 2022 to fight inflationary pressures.

Lighter COVID Restrictions and Policy Moves Support China
China (+3.23%) saw the yuan strengthen in December, hitting a four-month high against the USD. This came in the wake of the government’s decision to relax China’s strict COVID rules, with further easing expected in 2023. However, the moves triggered a significant spike in local COVID-19 cases, which investors fear could cause more near-term disruption. The People’s Bank of China (PBoC) injected a net 1.68 trillion yuan into the economy via open-market operations in the last two weeks of December, the most during this period since 2016. In the first half of 2023, market participants also expect the PBoC to cut the medium-term lending rate by 25 bps or reduce the amount banks are required to keep in reserve. They also believe the PBoC will continue to provide targeted policy support for the stressed property sector.

Dollar Weakness and Rate Hikes Underpin the Philippine Market
Across in the Philippines (+3.17%), the peso recovered from its recent lows, with momentum supported by USD weakness and significant interest-rate hikes from Bangko Sentral ng Pilipinas (BSP): 75 bps in November and 50 bps in December. These matched moves made by the Fed. The central bank also raised its 2023 inflation forecast to 4.5% from 4.3% YoY and believes that inflationary risks remain given the second-round effects of higher food and energy prices. Headline inflation continued to print at 8%+ YoY in November and December, giving the BSP an incentive to deliver further interest-rate hikes at its February and March meetings.

Tentative Steps Back into Malaysia
Malaysia (+2.62%) delivered modestly positive returns in the bond and FX components, as foreign investor flows and risk appetite made a tentative return following light investor allocations throughout most of 2022. Malaysia recorded growth of 4.8% quarter on quarter (14.2% YoY) in the third quarter of 2022. This was driven by encouraging performance in most economic sectors, especially services. Headline consumer inflation remained unchanged at 4% YoY in November, while core inflation increased to 4.2% from 4.1% over the same period. The Bank Negara Malaysia is expected to hike interest rates by another 25 bps to 3% in January 2023.

Policy Moves Meet Expectations
Nearby Indonesia (+2.05%) witnessed a small positive performance in December. Following three consecutive 50 bp hikes from September to November, Bank Indonesia (BI) raised interest rates by 25 bps to 5.5%, which was in line with market expectations. Growth forecasts were left unchanged at 4.5-5.3% for 2022 before slowing slightly, but within the same range, in 2023. Inflation forecasts were tweaked lower, with the core measure expected to stay below 4% this year.

A Potential End to Hawkish Interest-Rate Rises Provides Relief
Hong Kong (+0.81%) bonds also saw a small positive return in December amid expectations that the current cycle of interest-rate rises could be nearing an end. Following the Fed’s move, the Hong Kong Monetary Authority raised its base rate by 50 bps to 4.75%, maintaining the city’s currency peg with the USD. Border reopening with mainland China is expected to boost trade, as well as bolster consumer sentiment and the services sector, albeit gradually.

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