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.
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.
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.
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 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.
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.
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.
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.
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.
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.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 30 September 2021 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.