A falling US dollar and stabilizing US yields have supported Asia’s bond markets. However, beneath the surface, an
uneven recovery and the ongoing pandemic continue to cloud the broader economic picture.
SSGA Fixed Income Portfolio Strategists
May 14, 2021
Asia’s bond markets delivered broadly positive returns in April 2021. The Markit iBoxx ABF Pan-Asia Index was up by +1.79% on an unhedged basis in US dollar (USD) terms, while it rose by +0.55% on a hedged USD basis. A partial reduction in market volatility, broad USD weakness, and a stabilization in United States (US) yields enabled all markets in the index to produce positive returns over the month.
Singapore tempers optimism with caution
Singapore bonds rose by +2.36% in USD terms, mainly from the foreign-exchange (FX) component (+1.45%). In its April 2021 macroeconomic review, the Monetary Authority of Singapore (MAS) highlighted optimism over the economic recovery, noting robust industrial production data and continued progress with COVID-19 vaccinations. However, it cautioned that the outlook for the worst-hit sectors is weak, and an early reopening of international borders remains unlikely. It also suggested that FX policy settings would probably be left unchanged at its next policy review meeting.
Ongoing COVID outbreak weighs on Indonesia's recovery
Indonesia's bonds gained +2.35% over the month, with local-currency issues (+1.66%) comprising a significant part of the positive return. While manufacturing-sector activity continues to improve, the services sector is still sluggish. The government has yet to contain the domestic COVID-19 outbreak, which will depress economic activity for some time. Investors expect Bank Indonesia to leave interest rates unchanged at 3.5% throughout 2021. The central bank justified its recent decision to remain on hold by underlining the need for a stable rupiah.
Gradual improvements in Malaysia
Malaysia's bond markets were up by +2.24%, with both local-currency bonds (+1.08%) and the FX element (+1.14%) making broadly equal contributions. Recent data suggests that there will be ongoing improvements in economic activity in the first quarter of 2021 and into April 2021. Core inflation is also expected to remain subdued, averaging between 0.5% and 1.5% for the year, as there is still room for the economy to expand without a subsequent rise in the prices of goods and services. Market participants anticipate that the central bank may leave interest rates unchanged for the remainder of the year.
China's growth story holds fast
China bonds saw a return of +1.98% over the month, primarily due to the stronger renminbi (+1.38%). China's positive growth story is still intact, with improving manufacturing investment, positive vaccination momentum, a recovery in consumer activity, and a further relaxing of social restrictions.
The Philippines prioritizes the economic recovery
Philippines' bond market gained 1.48%, split between local currency (+0.70%) and FX returns (+0.77%). The Bangko Sentral ng Pilipinas' challenge has been balancing the economic recovery with the extension of stricter social-movement restrictions. That said, investors believe that the central bank will keep its policies unchanged in 2021. Meanwhile, the vaccine drive remains slow, but the authorities have pledged that a bulk delivery of doses will arrive by the third quarter of the year.
Headwinds blow in Thailand
Thailand's bond market delivered a positive 1.45% return, with both local-currency bonds (+0.96%) and FX (+0.48%) aiding performance. A slower-than-expected recovery and global economic pressures remain a problem, and progress on the vaccination front is slow. With interest rates at or very close to the lower end of the central bank's limit, the Bank of Thailand is expected to hold these at 0.5% over the medium term.
Foreign exchange compensates for a local-bond decline in Korea
Korea's bond market climbed by 1.24% over the month, with FX (+1.74%) the sole driver. By contrast, the local-currency bond element (-0.50%) fell. The decline in bond prices has been driven mainly by expectations that the recovery – led by exports and investment – will continue. Observers think that the central bank is preparing for a more 'normal' monetary- policy environment, noting that higher consumer inflation will be underpinned by rising demand.
Uneven recovery in Hong Kong
Hong Kong saw a modestly positive return of +0.70% over the month, from both local-currency bonds (+0.58%) and FX (+0.12%). Hong Kong experienced a solid but uneven recovery in the first quarter of 2021, with booming exports tempered by weaker domestic spending. As such, economic activity remains below pre-recession levels, with a slow vaccination rate and social-distancing measures keeping progress in check.
Source: State Street Global Advisors, Bloomberg Finance L.P., Barclays, iBoxx, as of 30 April 2021.
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The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 30 April 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