Insights

Asian Bonds Retreat Amid Weak Economic Demand

Asian bonds remained under pressure amid slowing global demand and local-currency weakness coupled with real-estate and COVID-related challenges in China.

SSGA Fixed Income Portfolio Strategists

November 29, 2022

Asia bond markets saw modest weakness in October 2022, with the Markit iBoxx ABF Pan-Asia Index returning -0.73% on an unhedged basis in United States dollar (USD) terms and +0.10% on a USD hedged basis.

Despite an easing of some of the more severe moves experienced by developed-market bonds and currencies in September, the spillover from slowing global demand continued to affect fixed-income returns in Asia. Furthermore, China’s housing crisis and intensified COVID lockdowns remained headwinds for the region.

Market	Local-Currency Return	Foreign-Exchange (FX) Return	Return (in USD)
Indonesia	-0.70%	-2.34%	-3.03%
China	0.78%	-2.72%	-1.96%
Malaysia	0.55%	-1.95%	-1.41%
Hong Kong	-1.37%	0.00%	-1.37%
Korea	-0.94%	0.44%	-0.51%
Thailand	-0.05%	-0.40%	-0.45%
Philippines	-0.92%	1.14%	0.20%
Singapore	1.06%	1.38%	2.46%

Indonesia’s Currency Feels the Strain

Indonesia (-3.03%) saw its assets underperform those of other Asian markets. This was particularly so in the foreign-exchange (FX) segment, with the rupiah remaining under pressure. This came despite ongoing trade and current-account surpluses underpinned by a narrowing rate differential with the US. Bank Indonesia (BI) hiked its policy rate by a further 50 basis points to 4.75% in October – a move that followed the larger-than-consensus 50 basis point rise in September. BI noted that the action was necessary to stabilize the rupiah. Market participants believe the BI will continue to withdraw liquidity and drive money-market rates higher. Even though the headline annual inflation rate fell slightly to 5.71% in October (versus 5.95% in September), it remains above BI’s 2-4% target.

China’s Interest-Rate Gap Widens

China (-1.96%) also faced currency pressure when the renminbi touched a fresh low against the USD in October – its eighth-straight decline this year. This came amid an ever-widening interest-rate gap between China bonds and those in developed markets. China also saw a nationwide flare-up in COVID cases, and health officials declared they would uphold strict virus-control measures. Meanwhile, China's Composite PMI weakened for the fourth straight month, printing 49.0 in October from 50.9 in September, the first contractionary print since the end of the Shanghai lockdown in June.

Political Uncertainty and Rate Hikes

In Malaysia (-1.41%), the ringgit was hit by a weaker-than-expected improvement in the trade balance as well as political uncertainty. Malaysia dissolved its parliament and announced that a general election would likely be held in the middle of November. Also, Bank Negara Malaysia increased its policy rate by 25 basis points to 2.75% - the first time it has delivered four consecutive hikes. This was a pre-emptive move aimed at alleviating the risk of excessive demand-driven price pressures as increasing arrivals lifted tourism-related sectors.

Weaker Than Anticipated GDP in Hong Kong

Hong Kong’s (-1.37%) underperformance in October was driven by weak local-currency bond returns, given it raises rates in lockstep with an aggressive US Federal Reserve (Fed). GDP growth contracted by 4.5% year on year in the third quarter of 2022, which was worse than expected. Specifically, consumption demand, in the form of slowing retail sales, remained sluggish. Consumer inflation rose to 4.4% year on year in September (from 1.9% in August), primarily because the government waived rentals on most public housing in September.

Persistent Inflation in Korea

Korea (-0.51%) declined during the month, with local-currency bond returns offsetting positive FX performance. Inflation remained persistent, with core consumer prices rising by 4.2% year on year in October (from 4.1% in September) – this was the 11t h consecutive month of increases. Headline consumer inflation also moved higher to 5.7% (from 5.4% in September). This led market participants to believe that the Bank of Korea would continue to hike rates. In other developments, Korea’s expanding trade deficit, which comes after 12 years of surpluses, weighed on its currency too.

Political Uncertainty and Sluggish Growth

Thailand (-0.45%) also fell, with any upside from the recovery in its tourism sector overshadowed by political risks, a lack of consumption growth, and low capacity utilisation. The Bank of Thailand is expected to continue with its policy of gradual rate hikes while maintaining a supportive approach to funding. High oil prices and baht depreciation underpinned by yield differentials versus US Treasuries are key risks to note.

Currency Recovery in the Philippines

Philippines (0.2%) saw the peso enjoy a slight bounce in October after a cumulative weakening of almost -13.7% from the year-end to September. On 14 October, after a higher-than-expected US inflation report, the governor of the Bangko Sentral ng Pilipinas (BSP) suggested that the central bank would deliver a 50–75 basis point hike at its next policy meeting to maintain the interest-rate differential with the Fed.

Policy Tightening in Singapore

Singapore (2.46%) performed well in FX and local-currency bond terms. In October, the Monetary Authority of Singapore (MAS) re-centred the mid-point of its Singapore-dollar nominal effective exchange rate (S$NEER) policy band but kept the slope and width of the band unchanged. The move was the fifth time the MAS has tightened its monetary policy since October 2021 — including two adjustments in January and July, which allowed the Singapore dollar to appreciate relative to other currencies in the region. Near-term inflation concerns remain a top priority, with expectations for 2022 moving to the top of the MAS’ previously forecast ranges (core:4% and headline 6%). Projections for next year increased as well, with core at 3.5-4.5% and headline at 5.5-6.5%.

Footnotes

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