Default Concerns and Fed Tapering Knock Asian Bonds
Asian bond markets declined in September, as investors grew concerned about corporate debt levels and sooner-than-expected Fed tapering
SSGA Fixed Income Portfolio Strategists
Overall, Asian bond markets saw negative returns in September 2021, with the Markit iBoxx ABF Pan-Asia Index declining by -2.04% on an unhedged basis in United States dollar (USD) terms. Meanwhile, it also fell by -0.89% on a USD hedged basis. Emerging markets (EM) failed to make progress amid the economic slowdown in China and challenges in its real-estate sector. Most notably, investors grew increasingly concerned about the potential fallout if leading property developer defaulted on its debt repayments. Elsewhere, the US Federal Reserve (the Fed) revealed that it intended to conclude its monthly asset-purchase program by the middle of next year – the so-called ‘tapering’ process. This timeframe was sooner than the market had expected.
Currency gains fade in Thailand
Thailand was the weakest market in September 2021, losing -6.32%, as the baht gave up all the gains it had made the previous month. Despite a relatively light and mainly localized Delta-variant outbreak, Thailand has seen limited tourist arrivals, weakness in its vaccine rollout program, and a deteriorating current-account balance. This, coupled with the Bank of Thailand’s lack of monetary-policy options, combined to trigger the currency sell-off.
Investor enthusiasm for Korea weakens
Korea bond markets returned -4.23% over the month, which was broadly split between local rates (-2.20%) and foreign exchange (FX) (-2.07%). Overseas investor inflows moderated as market participants grew less enthusiastic about prospects for Korea’s bonds. With the Bank of Korea forecasting that economic growth would be in the region of 4% in 2021, and headline inflation in September 2021 exceeding its 2% target for the sixth consecutive month, investors expect the central bank to raise interest rates again in November 2021. In addition, semiconductor-component shortages and the negative spill-over from the growth slowdown in China have also affected Korean assets.
Limited policy options in Manila
The Philippines declined by -3.22%, led by a weaker peso (-2.43%). Following its September 2021 meeting, Bangko Sentral ng Pilipinas (BSP) kept interest rates unchanged at 2%, which was in line with the market’s expectations. A high COVID-19 caseload, relative to its regional peers, current-account deterioration, low real rates, and persistently high inflation are limiting the BSP’s ability to reduce interest rates further, which were key factors in the peso’s decline.
Singapore faces the Delta strain
Singapore bonds dipped by -2.48% in September 2021 when measured in USD terms. The rates (-1.18%) and the FX components (-1.32%) both detracted. As their appeal has waned, Singapore’s local bonds sold off in tandem with other developed-market issues. Meanwhile, the government responded to rapidly increasing COVID infections by tightening social-distancing measures from 27 September 2021 to 24 October 2021. Market participants expect the Monetary Authority of Singapore to leave FX policy settings unchanged at its next review in mid-October 2021.
Political maneuvers in Malaysia
Malaysia fell by -1.26%, with both rates and FX selling-off. Political developments remained in focus when the Prime Minister and his Cabinet resigned when they lost their parliamentary majority. The resultant uncertainty is expected to have a negative impact on Malaysia’s fiscal deficit. What’s more, the risk premium placed on its market has remained high in anticipation of the Fed’s expected asset-purchase tapering.
Manufacturing and consumption remain healthy in Hong Kong
Hong Kong returned -0.49%, with most of the loss incurred by the local-bond element (-0.42%), which was negatively affected by weakness in US Treasuries. Demand in Hong Kong, particularly from the consumer, remains underpinned by government stimulus and the improved COVID situation. Manufacturing data was slightly weaker in August but is still improving overall, suggesting ongoing improvements in growth momentum.
Steady progress in Indonesia
Indonesia lost -0.29% during the month, which was entirely driven by the FX element. Bank Indonesia made no change to interest rates, which remained at 3.5%. This was in line with market predictions. The central bank governor also downplayed the potential impact on the rupiah of the Fed’s impending tapering. He also noted that the bank would coordinate future policy actions with the government to ensure currency stabilization. Investors expect the central bank to maintain it low interest rate for as long as possible to support economic growth – a stance that will be helped by docile consumer inflation.
China’s safe-haven attractions come to the fore
Lastly, China rose by 0.12%, with most of this gain coming from the local bond component. Ongoing developments in China's equity and real-estate markets had a negligible impact on the renminbi, and bond prices have been supported by investors seeking a ‘safe haven’ from uncertainty elsewhere. In terms of economic-data releases, China’s manufacturing output fell for the sixth straight month in September. Recent power restrictions partially reflect China's broad decarbonization efforts, as well as coal shortages. As such, the pressures being placed on sectors that require large amounts of energy, such as chemicals, coal, and steel, are likely to linger in the near term. The minutes of the People’s Bank of China’s quarter-three policy meeting revealed that it might reduce the amount banks need to hold in reserve and renew medium-term lending packages to boost the banks’ ability to lend.
Source: State Street Global Advisors, Bloomberg Finance L.P., Barclays, iBoxx, as of 30 September 2021.
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