Asian bond markets slid in April as rising inflation, US-dollar strength, and central bank tightening combined to unsettle the region’s investors.
SSGA Fixed Income Portfolio Strategists
Asian bond markets fell sharply in April, continuing their sell-off from the previous month. The Markit iBoxx ABF Pan-Asia Index returned -4.02% on an unhedged basis in United States dollar (USD) terms, while it was down by -1.48% on a USD hedged basis. The declines were driven by broad USD strength, risk-averse investors, and a sharp and sustained increase in inflation that led central banks across Emerging Asia to adopt less supportive financial policies.
|Market||Local-Currency Return||Foreign-Exchange (FX) Return||Return (in USD)|
Thailand was the region’s worst performer (-6.43%), with the local currency bond and foreign exchange (FX) elements under pressure. Despite year-on-year inflation slowing from 5.73% in March to 4.65% in April, investor concerns about rising energy imports and the relatively strong influence energy prices have on consumer inflation proved unhelpful for the market’s returns. In the near term, the Bank of Thailand is expected to hold interest rates at 0.5%, although it will likely come under pressured to raise borrowing costs if demand-driven inflation starts to rise.
Malaysia (-6.38%) sold off as investors increasingly anticipate a 25 basis point (bps) interest-rate hike by Bank Negara Malaysia (BNM) at its May policy meeting. While headline consumer inflation remained essentially unchanged at 2.2% (year on year )in March, core inflation rose from 1.7% to 2%, its highest in over 31 months. Inflation is also being pushed higher due to rising wage costs, as the government proceeded with a 25% minimum wage hike on 1 May, despite calls for a more gradual implementation of the policy.
Korea (-5-58%) also experienced weakness, as mounting oil and food prices helped propel consumer inflation to 4.8% in April (from 4.1% in March), which is the highest level since Oct 2008. Meanwhile, core inflation for the month rose to 3.1%. At its April policy meeting, the Bank of Korea raised interest rates by 25 bps to 1.5% amid concerns about rising costs and wage pressures. Furthermore, market participants expect another rate hike in May.
China (-3.65%) saw its FX element depreciate sharply, given mounting concerns about slowing growth as it continued to pursue its zero-COVID approach amid surging cases. From a policy perspective, the People’s Bank of China left interest rates unchanged and made a smaller than expected cut in the amount of money banks need to hold in reserve. China also saw further foreign capital outflows.
Singapore (-2.91%) The Monetary Authority of Singapore (MAS) tightened monetary policy in April, by both changing the mid-point of the exchange rate policy band at the prevailing level of the S$NEER, and increasing slightly the rate of appreciation of the policy band. The MAS noted that external inflationary pressures have intensified and anticipates that supply-demand mismatches in commodities and transport bottlenecks will persist. Core inflation is now expected to come in at 2.5–3.5% this year, from the 2–3% predicted in January, while consumer inflation is forecast at 4.5–5.5%, from the earlier range of 2.5–3.5%.
Hong Kong (-2.59%) was negatively affected by the poor performance of the local currency bond segment. As Hong Kong imports its monetary policy due to a linked exchange rate with the US dollar, it will be forced to raise borrowing costs when the US Federal Reserve hikes interest rates. However, despite surging global commodity prices, inflation has remained benign due to a growth slowdown from the latest COVID wave and second-order effects from the outbreaks in China.
Indonesia (-1.69%) also sold off, but the decline was less pronounced than elsewhere. Bank Indonesia (BI) kept interest rates unchanged at 3.5%, emphasizing that inflation remains under control and poses no risk to economic stability. Furthermore, it stated that it will only respond if core inflation (still a moderately low 2.4%) starts to climb higher. Lastly, the central bank noted that it would continue to work closely with the government to keep inflation within the 2-4% target.
In the Philippines (-1.49%), inflation increased, breaching the central bank’s 2-4% target, with pressure coming from the rising cost of food, fuel, and utilities. However, inflation in demand-driven categories, such as furnishing, recreation, and restaurants, remains low. Market participants believe that the central bank may look through inflationary pressures for another few months.
Source: State Street Global Advisors for commentary, Bloomberg Finance L.P. for economic data, IHS Markit for Markit iBoxx ABF Pan-Asia Index data, and return data showing in the performance table, as of 30 April 2022.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance.
Diversification does not ensure a profit or guarantee against loss.
Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 30 April 2022 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 those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.