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Asian Bonds Close 2023 With Positive Performance

Asian bond prices ended the year on an upbeat note amid soft economic data. Market participants now expect an accelerated rate-cutting cycle in 2024.

5 min read

SSGA Fixed Income Portfolio Strategists

In December 2023, the Markit iBoxx ABF Pan-Asia Index returned +2.7% on an unhedged basis in US-dollar terms. This took the annual performance for 2023 to +5.7%, the best since 2020. Asian bond yields declined for a second consecutive month, leading to positive local-currency returns, with the Index delivering a +2.1% return on a US-dollar-hedged basis. Most Asian currencies also gained against the US dollar, adding to returns in unhedged currency terms (in US dollars).

On average, Asian bond yields fell by 33 basis points in December 2023, which aligned with the global trend of declining bond yields. That said, the easing of Asian bond yields was more modest than the sharper reduction seen in the United States. Similar to November 2023, global economic releases in December 2023 were, on aggregate, surprisingly weak, led by the United States. Economic surprises remained modestly negative in China as well. At its meeting in December 2023, the median of US Federal Reserve (Fed) members now expect a cumulative 75 basis points of interest rate cuts in 2024 (compared to the 25 basis points expected at the Fed’s September 2023 meeting).

Market participants also further reduced their interest rate projections, expecting a total of six 25-basis-point interest-rate cuts (or a cumulative 150 basis points of interest rate reductions based on federal funds futures pricing) in 2024 compared to four rate cuts (or a cumulative 100 basis points of interest rate reductions) predicted at the start of December 2023. Consequently, the much-anticipated Fed pivot moved closer, aiding the broad-based global decline in government bond yields.

Market Local Currency Bond Return FX Return Total Return (in USD)
Thailand 1.9% 2.7% 4.6%
S. Korea 3.9% 0.2% 4.1%
Singapore 2.0% 1.1% 3.2%
Malaysia 1.0% 1.6% 2.6%
Hong Kong 2.1% -0.1% 2.1%
Philippines 1.8% 0.2% 2.0%
Indonesia 1.2% 0.7% 2.0%
China 1.1% 0.5% 1.6%

Currency Strength and Easing Consumer Prices in Thailand

Thailand (+4.6%) was the best-performing Asian market in US-dollar-unhedged terms, as the benchmark 10-year bond yield fell by 28 basis points, contributing to a positive local-currency return of +1.9%. Meanwhile, the Thai baht was the strongest currency among the PAIF markets, gaining +2.7%. Headline consumer inflation indicated a larger-than-expected fall in prices, while core inflation readings remained firm. Leading economic newsflow, such as car sales and Purchasing Managers' Index (PMI) data, remained resilient, while Thailand’s import numbers were also better than anticipated. More extensive fiscal stimulus measures set to be implemented in 2024, such as digital wallet handouts, are expected to keep inflationary expectations firm. This led market participants to expect interest rates (still at a decade-long high) to remain unchanged in 2024.

Substantial Fall in South Korea’s Benchmark 10-Year Bond Yield

In South Korea (+4.1%), the benchmark 10-year bond yield declined by a significant 91 basis points to its lowest level since the third quarter of 2022. Consequently, local-currency returns (+3.9%) were the best among Asian markets during the month. Meanwhile, the Korean won remained primarily unchanged. Consumer inflation data for November 2023 was lower than expected, while other economic newsflow, such as the unemployment rate and imports, were also weaker than predicted. Consequently, market participants affirmed their expectations for a cumulative 75 basis points of interest-rate cuts in 2024.

Declining Growth Trend in Singapore

Singapore (+3.2%) witnessed a positive return of +2.0% in the local-currency terms, aided by a 26 basis point decline in the benchmark 10-year bond yield. At the same time, the Singapore dollar saw a +1.1% gain. Headline consumer inflation data was unexpectedly weak, while other key economic newsflow, including retail sales and industrial production, also indicated a softening growth trend. Market consensus now expects the Monetary Authority of Singapore to ease policy this year, with the policy-setting frequency increasing to quarterly.

Modest Dip in Malaysia’s Local-Currency Bond Yields

Malaysia’s (+2.6%) benchmark 10-year bond yield was down by nine basis points, leading to a positive local-currency bond return (+1%). A +1.6% appreciation in the Malaysian ringgit also improved returns on an unhedged US-dollar basis. Economic releases, such as PMI data, industrial production and imports, were marginally better than expected, leading to a modest decline in local-currency bond yields compared to other Asian markets. However, consumer inflation data was surprisingly weak. Market participants expect Bank Negara Malaysia to keep interest rates on hold in 2024.

Improving Economic Newsflow in Hong Kong

Hong Kong’s (+2.1%) seven-year benchmark bond yield fell by 56 basis points in December 2023 – its lowest level since the third quarter of 2022. As a result, the local-currency bond return was +2.1%. Pegged to its US counterpart, the Hong Kong dollar remained the laggard among Asian currencies, declining by -0.1% over the month. The slide in the local-currency bond yield was more pronounced than the global trend, as consumer inflation data was down by marginally more than expected. However, economic newsflow, such as PMI data and industrial production, were on an upward trend compared to November 2023. In line with the Fed, the Hong Kong Monetary Authority (HKMA) kept its base rate unchanged while noting that Hong Kong dollar inter-bank rates should remain high for some time. In other key news, the HKMA also announced a second tokenized green bond offering in the first quarter of 2024.

The Philippines Reveals Surprisingly Weak Trade Data

Across in the Philippines (+2.0), the benchmark 10-year bond yield declined by 26 basis points, which was its second consecutive monthly fall. This move contributed to a +1.8% local-currency return in December 2023. The Philippine peso remained essentially unchanged against the US dollar. Trade data, especially exports, fell by more than expected, leading the Philippine peso to underperform its Asian peers. Consumer inflation data was softer than anticipated, and the Bangko Sentral ng Pilipinas (BSP) kept interest rates unchanged at its December 2023 meeting. The BSP also lowered its inflation forecast for 2024. Market participants expect interest rate cuts to begin in the third quarter of 2024.

Indonesian Interest Rates Unchanged as Inflationary Challenges Persist

Like its Asian peers, Indonesia (+2.0%) also delivered positive local-currency bond returns. However, the benchmark 10-year bond yield saw a smaller decline (down by 15 basis points) than other Asian markets. The Indonesian rupiah appreciated by +0.7%, thereby improving US-dollar unhedged returns. Indonesia’s trade balance was weaker than anticipated on a stronger rebound in imports, while November 2023’s consumer inflation data moved unexpectedly higher. As widely predicted, Bank Indonesia (BI) kept interest rates unchanged at its policy meeting. BI governor Perry Warjiyo guided that the central bank may not follow the Fed’s rate cuts in 2024 as inflation risks remain high. Indonesian rupiah volatility will also likely persist ahead of the national elections in February 2024.

Record Liquidity Injection in China

China’s (+1.6%) local-currency bond performance lagged other Asian markets in December 2023, with the benchmark 10-year bond yield falling by 13 basis points during the month (compared to an average decline of 33 basis points across other Asian markets). The Chinese yuan was up by a modest +0.5% during the month against the US dollar. After steady improvements since July, economic releases were surprisingly weak, albeit modestly, in December 2023. In particular, import data and retail sales were softer than anticipated, while consumer price deflation was larger than predicted. While the People’s Bank of China kept its benchmark loan prime rates unchanged, the central bank infused a record 800 billion yuan of liquidity into the banking system via medium-term lending facility (MLF) loans. Notwithstanding these substantial easing measures, market participants expect further policy support in the first half of 2024, including further cuts in the banks’ reserve requirement ratio.

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