Insights

Asian Bonds Clouded by Stagflation Concerns

Asian bond markets were overshadowed by concerns about stagflation as interest rates rose, US economic data weakened, and inflation persisted.


SSGA Fixed Income Portfolio Strategists


Asian bond markets delivered broadly negative returns in June 2022, with the Markit iBoxx ABF Pan-Asia Index declining by -2.88% on an unhedged basis in United States dollar (USD) terms. The index also fell by -0.99% on a USD hedged basis.

The risk of stagflation – characterized by rising inflation and a stagnating economy – increased as fears grew that global central bank efforts to tame inflation would hamper growth. Economic data in the US was surprisingly weak, with a slowdown in the housing sector and sluggish consumer spending. This resulted in a poor month for risk assets, capital outflows from emerging markets, and USD strength. For now, Asia appears better placed than other regions, with the gradual reopening in China expected to boost growth. However, easing external demand (mainly from Europe) may prove challenging.

Market Local-Currency Return Foreign-Exchange (FX)  Return Return (in USD)
Korea -2.43% -4.71% -7.03%
Philippines -0.94% -4.47% -5.36%
Thailand -0.55% -3.09% -3.63%
Singapore -1.90% -1.47% -3.34%
Indonesia 0.15% -2.04% -1.90%
Hong Kong -1.25% 0.03% -1.23%
Malaysia -0.55% -0.61% -1.16%
China -0.23% -0.56% -0.79%

Stubborn Inflation and Looming Interest-Rate Hikes

Korea (-7.03%) continued to see persistent increases in actual and expected inflation. The CPI report for May showed that prices rose by 5.4% year on year, up from 4.8% in April. Furthermore, the inflation estimate for the next 12 months is now 3.3% (year on year) – a 10 year high. Market participants are also pricing in more aggressive interest-rate hikes by the Bank of Korea, with 125 basis points (bps) of increases predicted for 2022, with headline inflation driven by higher energy costs and a strong labor market as the economy reopens.

Peso Weakens on Disappointing Rate Hike and Wider Deficits

In the Philippines (-5.36), the peso weakened significantly during the month, ending June at its lowest level in 15 years when Bangko Sentral ng Pilipinas (BSP) increased its overnight borrowing rate by only 25 bps – the market had expected more, especially after the Fed’s 75 bps hike. The BSP also raised its inflation forecast, with expectations for 2022 sitting at 5% (4.6% forecast in May). Meanwhile, 2023 expectations are 4.2% (3.9% forecast in May). A widening current account and balance of payments deficits also contributed to foreign exchange (FX) weakening, highlighting a dependence on financing inflows.

Current Account Deficit Persists Despite Uptick in Tourism Revenue

Even as domestic demand and economic activity in Thailand (-3.63%) continued to improve with a revival of the tourism sector, its current account was still in deficit in June, and the baht remained under pressure on expectations of further current-account challenges. These will be underpinned by oil prices and the significant interest-rate differential compared to the US.

Broad-Based Price Rises in Singapore

Singapore (-3.34%) saw underperformance in both the local bond and FX segments, as core and headline inflation continued to rise – May’s core inflation print of 3.6% hit a 14-year high, and inflation has been broad based. Investors now expect the exchange rate to rise by a full percentage point by the year-end (from 1.5% to 2.5%).

Currency Pressures in Indonesia as Rate Rises Lag Other Markets

Indonesia (-1.9%) also declined. Bank Indonesia (BI) kept interest rates unchanged at 3.5% at its end-June meeting, which was in line with expectations. The rupiah has been under pressure recently, with markets considering the risk of BI falling behind the rate-hiking curve compared to other central banks – especially as the BI’s governor noted that headline inflation could breach the 4% upper limit in 2022.

Weak Spending Persists in Hong Kong

Hong Kong (-1.23%) saw modest weakness in local-currency bonds. This was in line with the US, from which Hong Kong imports its monetary policy. Elsewhere, the FX segment was flat. Hong Kong’s consumer inflation was broadly soft, contrasting sharply with most of its regional peers. The CPI report for May revealed that price rises were 1.2% year on year (from 1.3% in April). Also, year-on-year retail sales contracted by 1.7% in May, but this was from a relatively high base in May 2021. However, an element of this number came from the frontloading effect of the consumption-voucher program, as the equivalent numbers were a robust 11.7% in April.

Economic Reopening Underpins Inflation in Malaysia

Malaysia (-1.16%) experienced modest underperformance in both local rates and FX, as increases in food and transport prices saw headline consumer inflation rise to 2.8% year on year in May (from 2.3% in April). Core inflation moved up to 2.4% (from 2.1% in April) as reopening led to a demand-driven upswing in prices, particularly in the services sector. Following the 25 bp hike in May, market participants now expect Bank Negara Malaysia to hike twice more, bringing the policy rate to 2.5% by the end of this year.

Manufacturing and Services Recover in China

China (-0.79%) saw local rates and FX decline, albeit modestly in a volatile month for broader emerging-market assets. Manufacturing data recovered in June, the first such monthly expansion since February. Similarly, the service sector picked up during the month, reflecting the positive impact of looser COVID-related restrictions and improvements in supply delivery times.


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