How the Pandemic and China Growth Checked Asian Bonds
Asian bonds fell in June amid concerns about rising COVID cases, hesitant vaccination programs, and slowing growth in China.
SSGA Fixed Income Portfolio Strategists
Asian bond markets saw negative returns in June, with the Markit iBoxx ABF Pan-Asia Index falling by -1.03% on an unhedged basis in US dollar (USD) terms. However, in USD hedged terms, the index was up by 0.19%. The recovery picture in EM Asia remained mixed, with Korea and Taiwan still leading the way. However, the slow rollout of vaccination programs and a resurgence of COVID variants have resulted in weaker-than-expected improvements in other markets. Elsewhere, growth in China appeared to be nearing its peak.
Economic slack in Singapore
Singapore bonds were down by -1.76% in USD terms, led by the foreign-exchange (FX) component (-1.57%). Although the country should reach herd immunity by September, border controls are expected to remain until early 2022. As travel-related sectors are crucial to filling spare capacity in the economy and repairing the labor market, the country unlikely to return to normal output levels this year. Investors believe that the Monetary Authority of Singapore will leave its FX policy settings unchanged at the next policy review in October.
Limited protection against an economic slowdown
Thailand declined by -1.73%, with market’s FX element (-2.31%) outweighing a positive return (+0.6%) from local-currency issues. The reopening of tourist centers to vaccinated travellers has not led to an influx of visitors, and the number of infections from the third wave of COVID-19 continues to rise. This, together with the slow pace of vaccinations and vaccine shortages, have weakened the country’s near-term economic outlook.
Momentum starts to fade
China bonds saw returns of -1.42% in June, primarily due to renminbi weakness (-1.36%). Credit growth has slowed from its peak in October 2020 on the back of government efforts to restrict unregulated financial activity. Also, recent manufacturing output data was lower than anticipated, and there has been an easing in export growth. Meanwhile, consumer spending has slowed from its peak. Despite higher inflation numbers, the People’s Bank of China has downplayed inflationary risks and continues to focus on tighter credit policy rather than make changes to its monetary policies.
Indonesia keeps on moving
Indonesia bond markets dipped by -0.91% over the month, with FX weakness (-1.45%) offsetting the local-currency element, which was up by 0.55%. Despite a rise in COVID-19 infections, we have not seen a parallel decline in the movement of people since the government announced a tightening of social-distancing measures in the middle of the month. At its June policy meeting, Bank of Indonesia made no changes to interest rates noting that it would keep its supportive policy measures in place to reinforce the economic recovery.
A path to normality
Korea bond markets fell by -0.71%. The FX element (-1.34%) negated a slight positive from local-currency issues (+0.64%). The medium-term outlook for Korea is still healthy, with rising inflation, the relatively fast rollout of vaccines, and a broadening recovery led by export growth combining to supporting the case for a return to more normal economic conditions. However, USD strength in June led to a dip in the Korean won.
The cost of the pandemic
Philippines retreated by -0.66%. A relatively robust local-currency component (+1.34%) was insufficient to offset a significant fall in the FX element (-1.97%). Incessant COVID-19 outbreaks, weak vaccine procurement, and shutdowns have derailed the country’s recovery path. Meanwhile, rising food and fuel costs have underpinned price inflation. The central bank remains focused on providing support to households and small businesses hit by the pandemic. It also aims to revive growth, which is unlikely to normalize in the near term.
Stable and growing stronger
Hong Kong bond markets saw a modestly negative return of -0.11% that came almost equally from the local currency and FX components. The overall picture in Hong Kong looks relatively upbeat, with COVID-19 infections under control and supportive government measures leading to improvements in consumer activity. Elsewhere, export growth has been robust – a visible improvement from the situation in 2020.
Recovery hangs in the balance
Malaysia returned 0.04%, as a weaker ringgit (-0.34%) was offset by local currency returns of +0.38%. While higher oil prices should be helpful, political, fiscal, and growth risks could derail Malaysia’s recovery. Therefore, much hangs on the execution of the government’s four-phased plan to reopen the economy, which, itself, depends on new infections falling below specific thresholds.
Source: State Street Global Advisors, Bloomberg Finance L.P., Barclays, iBoxx, as of 30 June 2021.
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