Resilient Trade and Cooling Inflation Offset Manufacturing Weakness in Asia

Global fixed-income markets posted negative returns in May 2025, with the Bloomberg Global Aggregate Index declining by 0.3% on a US-dollar-hedged basis, marking a partial reversal of the gains seen in April 2025. The sell-off was driven by rising government bond yields, particularly in the US and UK, as markets anticipated fewer rate cuts for the remainder of the year due to improved economic data and a more conciliatory trade policy stance by the US administration. During the month, Moody’s downgraded US sovereign debt from Aaa to Aa1, citing concerns about debt levels compared to gross domestic product (GDP) growth, higher interest rates and refinancing costs, tax cut extensions and reduced fiscal flexibility.

Asian bonds outperformed their global peers in May 2025, as the iBoxx ABF Pan-Asia Index (unhedged) rose by 1.62% during the month, with currency appreciation in Asia being the key driver (+1.25%). The underlying bonds also delivered a positive return, resulting in a 0.37% gain for the iBoxx ABF Pan-Asia Index (hedged). Support came from income, as 10-year yields, on average, remained nearly unchanged across Asian markets.

Currency Appreciation and a Rate Cut in Indonesia

Indonesia (USD unhedged: +3.1%) was the best-performing market in the iBoxx ABF Pan-Asia Index. In Indonesian-rupiah terms, the market was up by 1.0%, driven by a three-basis-point decline in the 10-year yield. Consumer inflation rose from 1.03% in March 2025 to an eight-month high of 1.95% year on year in April 2025. This was mainly due to a base-effect rebound in electricity prices. Other key economic data remained mixed, with manufacturing-related activities marking their first contraction in six months, as new orders and output saw a significant decline. Retail sales contributed positively. Bank Indonesia lowered the benchmark interest rate by 25 basis points to 5.5% at its May 2025 policy meeting, in line with market expectations. The Indonesian rupiah rebounded from a record low against the US dollar, appreciating by 2.1% during the month. This was mainly due to volatile US trade and fiscal policies, as well as capital flows from US-dollar-denominated assets into Asian markets. The currency momentum was also supported by Bank Indonesia’s decision to reduce borrowing costs.

Malaysian Inflation Remains Stable

Malaysia (USD unhedged: +2.5%) recorded a Malaysian-ringgit return of +1.0%, driven by positive income and price components, while the 10-year bond yield fell by 12 basis points. Annual inflation remained steady at 1.4% in April 2025, unchanged from March 2025, as predicted by the market. This remained the lowest level since February 2021, with food prices rising the least. Other key economic data was mixed. The manufacturing Purchasing Managers’ Index (PMI) survey remained in contractionary territory signaling industrial weakness. Trade data posted a moderate surplus supported by robust exports. Retail sales were also positive. As expected, at its May 2025 policy meeting, Bank Negara Malaysia held the benchmark interest rate at 3.0%. This marked the eleventh consecutive period of unchanged borrowing costs. The Malaysian ringgit appreciated by 1.5% against the US dollar during the month.

Lower Borrowing Costs in Thailand

Thailand (USD unhedged: +2.4%) saw a Thai-baht return of +0.4% with positive income and price components, while the 10-year bond yield fell by 10 basis points. Annual inflation declined from 0.84% to -0.22%, marking the first deflation in over a year, as energy and food prices slowed significantly. Other economic indicators remained mixed, as the manufacturing PMI survey contracted amid a slowdown in new orders, and production data marked a ninth consecutive month of decline. Thailand’s trade numbers were in deficit: despite a rebound in exports, imports rose more sharply led by the energy segment. However, retail sales continued to contribute positively. The Bank of Thailand trimmed the key interest rate by 25 basis points to 1.75% at its April 2025 policy meeting. The move was in line with expectations and brought borrowing costs to their lowest level since April 2023 amid a slowdown in inflation. The Thai baht returned 2.0% against the US dollar, supported by capital inflows and a recovery in tourism.

Trade Surplus Boosts Korean Won

South Korea (USD unhedged: +1.9%) declined by 1.1% in Korean-won terms, while the 10-year bond yield rose by 23 basis points. Key economic data remained mixed as annual inflation was unchanged at 2.1%, and the manufacturing PMI survey contracted, reflecting a sharp drop in output and weak new orders given global trade uncertainty. Retail sales contributed positively as consumer spending held up well buoyed by supportive government measures and stable employment conditions. Trade data posted a surplus driven by strong semiconductor and automotive exports. As expected, the Bank of Korea lowered the base rate by 25 basis points to 2.50% at its May 2025 policy meeting after holding rates steady in April 2025. The decision came as the economy contracted in the first quarter of 2025 amid easing inflation and the threat of US tariffs. The Korean won was the best-performing currency in May 2025, yielding 3.0%, mainly due to the trade surplus.

Global Insecurities Trigger Manufacturing Slowdown

Singapore (USD unhedged: +1.8%) recorded a Singapore-dollar return of +0.6% with positive income and price components, while the 10-year bond yield fell by four basis points. Annual inflation in April 2025 stood at 0.9%, unchanged from the previous month but slightly above the expected 0.8%. The figure also remained at its lowest level since February 2021. Other key economic indicators were mixed. The manufacturing PMI survey moved into contractionary territory, the first slowdown since May 2024, as softening new orders and output signaled rising global trade insecurities. However, retail sales saw a modest recovery with resilience in supermarkets, electronics, and leisure goods. Trade data posted a surplus, as exports outpaced imports. The Singapore dollar returned 1.2% against the US dollar during the month.

Further Easing by the People’s Bank of China

China (USD unhedged: +0.9%) recorded a negative Chinese-yuan return of -0.2%, while the 10-year bond yield rose by eight basis points. Economic data releases, on aggregate, remained mixed in April 2025, with stronger-than-expected imports and exports and a 4.0% decrease in new-home prices across 70 cities, which was slightly less than the 4.5% drop seen in March 2025. This marked the 22nd consecutive month of declines. PMI surveys were also varied, as industrial production was stronger than anticipated, but retail sales were surprisingly weak. China continued on its deflationary path in April 2025 (the Consumer Price Index fell by 0.1%), given lower food prices. This prompted the People’s Bank of China to reduce policy rates, including decreases in the one- and five-year loan-prime rates as well as the banks’ reserve requirement ratio (RRR). The RRR cut was predicted to release an additional US$138 billion in long-term liquidity. The Chinese yuan appreciated by 1.1% against the US dollar during the month.

Improving Production and New Orders

Philippines (USD unhedged: +0.7%) saw the 10-year bond yield rise by six basis points, yet it still managed to post a positive 0.4% return in Philippine-peso terms. Annual inflation edged down from 1.8% to 1.4%, the slowest pace since November 2019 and below the central bank’s 2.0% to 4.0% target range, as the prices of food and transportation eased. Other key economic data remained mixed, with the manufacturing PMI survey returning to expansionary territory, driven by rising production and new orders. Meanwhile, net trade data was better than expected, and retail sales continued to contribute positively. The Philippine peso appreciated by 0.3% against the US dollar.

Weaker Global Demand Dents Hong Kong Economy

Hong Kong (USD unhedged: +0.3%) was the weakest market in the iBoxx ABF Pan-Asia Index in May 2025. In Hong Kong-dollar terms, the bond market returned +1.4% with positive income and price components, while the 10-year bond yields fell by 16 basis points. Annual inflation rose to 2.0% in April 2025, up from 1.4% in March 2025, marking the highest level since January 2025. The increase was primarily driven by a lower ceiling on property rate concessions, coupled with higher housing and transportation prices. Other key economic data remained mixed. The Hong Kong Global PMI survey continued to contract, as manufacturing activity was lackluster, with declining new orders and sluggish production data due to weaker demand both domestically and internationally. Hong Kong’s trade deficit narrowed to HK$16 billion in April 2025 as imports outgrew exports. The Hong Kong dollar was the weakest performing currency, depreciating by 1.1% for the month, given its peg to the US dollar.