Market Commentary October 2020

SSGA Fixed Income Portfolio Strategists

November 15, 2020

EM Asia bond markets saw positive returns in October overall. The Markit iBoxx ABF Pan-Asia Bond Index returned +1.53% on an unhedged basis in US dollar terms, while it was up +0.17% on a USD hedged basis. Indonesia bond market performed the best, while Hong Kong bonds performed the worst over the month.

Indonesia bond markets returned +3.9% over the month, with both FX (+1.9%) and local rates (+2.0%) contributing. Even as Bank Indonesia left its policy rate unchanged at 4.0% in its October meeting citing the need to maintain external stability, it continued to strike a relatively dovish tone. With inflation expected to remain below the central banks’ target range, market participants believe that the central bank will eventually press on with rate cuts as realized GDP growth falls short of its projections.

Korea bond markets returned +2.3% over the month. The KRW ended the month stronger (+3.1%) and weakness was in local currency bond returns (-0.7%). Korea’s semiconductor exports were strong through the month, shrugging off Huawei concerns, and shipments momentum was strong through October-lending support to KRW. The central bank has acknowledged the need to maintain an accommodative policy stance in the near term, however it doesn’t see the need to lower policy rate beyond 0.5, considered close to its effective lower bound.

China bonds saw returns of +2.0% over the month, almost all from FX (+1.7%). China continues to lead the global economic recovery and its manufacturing PMI has stayed in expansionary territory for eight consecutive months, and above 51 since July – and services continued its improvement as well, benefiting from the long October holiday. Q3 growth in manufacturing industries have already exceeded pre-COVID levels, supported in part by strong exports. CNY was also supported by FX markets pricing in increasing probability of "Biden win" scenario though October.

Thailand bonds returned +1.5%, all of it from the stronger Baht over the month as the economy showed signs of gradual recovery in domestic demand - and manufacturing and agriculture activity have made significant progress. The monetary policy committee has unanimously voted to stand pat in its last three consecutive meetings, noting the need to “preserve the limited policy space” amid concern that further cuts could undermine financial stability.

Singapore bonds were up +1.1% over the month in USD terms. FX returns were 0.2%, while local currency bond returns were positive as well (+0.8%). The Monetary Authority of Singapore (MAS) left its FX policy settings unchanged as the decline in GDP moderated in Q3. Services activity have been leading the recovery, contracting by a smaller 8.0% y/y in Q3 compared with Q2's 13.6% decline. Consumer-facing sectors such as retail and food services saw an improvement in performance as the Singapore economy exited the Circuit Breaker.

Malaysia bonds returned +0.5% over the month, all of it from local currency bonds. Consensus expectations are for the Bank Negara Malaysia (BNM) to leave its overnight policy rate (OPR) unchanged at 1.75%. Industrial production (IP) growth rose only slightly in September, to 1.0% y/y from 0.2% previously, disappointing expectations and manufacturing output growth rose only modestly compared with the surge in manufactured exports.

Philippines bonds were returned +0.3% overall, evenly split between local currency bond and FX components. Bangko Sentral ng Pilipinas (BSP) maintained its overnight borrowing rate at 2.25% in its October meeting, in line with expectations. This was the second consecutive pause by the bank after delivering a cumulative 175bp of rate cuts. BSP governor Diokno noted some encouraging signs that growth may be improving and reiterated a commitment for an extended pause to aid the recovery going forward.

Hong Kong bond markets saw returns of -0.2% over the month, all of it from the local currency bond component, as the FX stayed flat. Even as retail sales, a significant part of its economy continues to contract, its residential property market has remained resilient amid ample global liquidity.

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