Market Commentary December 2020

SSGA Fixed Income Portfolio Strategists

January 18, 2021

EM Asia bond markets saw positive returns in December overall. The Markit iBoxx ABF Pan-Asia Bond Index returned +1.70% on an unhedged basis in US dollar terms, while it was up +0.61% on a USD hedged basis. Malaysia bond markets performed the best, while Hong Kong bonds performed the worst over the month.

Malaysia was among the best performers, returning +2.8%, with both local rates component and the FX contributing (FX: +1.3%, Local currency: +1.5%). Even though Malaysia had lagged the Asia EM rally in the previous months as a resurgence of COVID infections resulted in renewed restrictions, December saw a bounce-back in sentiment as the COVID-19 vaccine continues to be distributed in developed markets, lifting expectations of a return in external demand. 

Indonesia bond markets returned +2.7% over the month, mostly from the rally in local rates (+2.2%). Even though Bank Indonesia (BI) left its 7d reverse repo rate unchanged at 3.75% in its December meeting following a 25bp cut in November. Market participants continue to believe in more policy easing as the economic recovery remains challenging, and CPI inflation continues to remain below the central bank’s target range.

Thailand bonds returned +2.3%, with equal contributions from the stronger Baht as well as local rates over the month. While Bank of Thailand (BoT) left its policy rate unchanged at 0.50%, in line with consensus expectations, the THB saw appreciation because of foreign capital inflows following recent vaccine developments. The BoT seems to feel that further cuts could undermine financial stability and has left its policy rate unchanged at five consecutive meetings since June.

China bonds saw returns of +2.0% over the month, with local currency returns contributing 1.2% and the CNY appreciating by +0.8%. Both the bonds and FX were supported by continued improvement in China’s demand drivers, led by strong exports and manufacturing investment, steady recovery in retail sales and a resilient property market. Market participants continue to believe that the PBoC will keep the policy rate unchanged in Q1 and continue to tolerate further modest CNY appreciation.

Korea bond markets returned +1.4% over the month. The KRW ended the month stronger (+1.9%) and weakness was in local currency bond returns (-0.5%). Korea's manufacturing and employment PMIs have picked up, with confidence among both producers and customers increasing, along with levels of trade-related indices – lending support to the currency. Heavy supply in 2020 and expected in 2021 as the Ministry of Economy and Finance announced its 2021 KTB issuance plans, has all led to bearish pressure on rates.

Singapore bonds were up +1.3% over the month in USD terms, almost all from the FX. Gradual relaxation of social distancing measures, along with a faster-than-expected distribution of COVID-19 vaccines among the relatively small population has led to positive sentiment. Exports and manufacturing have also proven to be relatively resilient, aiding the recovery.

Philippines bonds were returned +0.6% overall, most of it from the local currency component (+0.5%). The Bangko Sentral ng Pilipinas (BSP) kept its policy rate at 2.00% in its December meeting, and maintained an accommodative bias to support growth amid benign price pressures. Even as preliminary Q4 data and mobility indicators show early signs of a rebound in activity, uncertainty remains elevated amid natural disasters on the domestic front.

Hong Kong bond markets returned -0.1% over the month, with both the local currency bond component and the FX staying almost flat. Repeated new waves of local infections, doubtful recovery in retail sales and other tourism-related businesses has continued to weigh-in on sentiment.

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