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Progressive Fed Tapering Helps Calm Market Nerves

Asian bond markets rose, as regulatory concerns in China were offset by signs of a more progressive approach to Fed tapering.

SSGA Fixed Income Portfolio Strategists


Asian bond markets saw positive returns in July 2021, with the Markit iBoxx ABF Pan-Asia Index rising by +0.34% on an unhedged basis in United States dollar (USD) terms, while it gained +1.36% on a USD hedged basis. Concerns about a regulatory crackdown in China and the recent surge in Delta-variant infections were balanced by a belief that the United States (US) Federal Reserve (Fed) would refrain from taking a more aggressive approach to normalizing monetary policy.

Investors eye safety in China

China was the best performing market, with a return of +1.8%. This was driven by the interest-rate component. Meanwhile, ongoing developments in China's equity markets had a negligible impact on the foreign exchange (FX) element (-0.12%). In addition, China’s bonds were supported by ‘safe haven’ demand from investors. Meanwhile, the People’s Bank of China announced a reduction in the amount that banks must hold as reserves. This move boosted expectations for further cuts in the final quarter of 2021, given moderating economic momentum due to slowing manufacturing activity and higher raw material costs. 

A focus on growth 

Indonesia also performed well, with support coming from both the rates (1.5%) and FX elements (+0.2%). The governor of Bank Indonesia said the institution would follow a pro-growth policy in  2021, pushing back against talk of a near-term increase in interest rates. As such, market participants now expect the bank to leave its policy rate unchanged at 3.5% for the remainder of this year and the first half of 2022.

Limited lockdown impact in Singapore 

Bonds in Singapore rose by +1.0% in USD terms, with rates (+1.6%) dominating the FX component (-0.6%). During the month, the government announced a four-week re-tightening of social-distancing controls. The economic impact of these measures is expected to be limited, and investors believe the Monetary Authority of Singapore (MAS) will leave its FX policy settings unchanged at the next policy review in October. Furthermore, with inflation remaining soft, there is no pressure on the MAS to ‘normalize’ its stance.

Promising GDP growth in Hong Kong

Hong Kong bond markets saw a modestly positive return of +0.7% over the month, mainly from the local-currency segment (+0.8%). Hong Kong’s economy has been slowly recovering from a two-year recession spurred on by the pandemic and political unrest. This was underlined by year-on-year GDP growth of 7.5% in the second quarter of 2021. And following last year’s cash handouts of HK$10,000 to residents, the city is now distributing a further HK$5,000 in vouchers to help restore consumer confidence.

Interest-rate rise in Korea could be delayed

Turning to Korea, where bond markets fell by -0.1%. The FX element (-2.1%) was partially offset by local rates (+2.0%). Korea's second-quarter GDP growth figure of 0.7% was slightly below market estimates; this followed a strong expansion (+1.7%) in the first three months of the year. Market participants still believe that the Bank of Korea will hike interest rates in August 2021; however, there is talk this may be delayed until October 2021, given the COVID situation and slightly weaker economic data.

Unease in Malaysia

Malaysia lost -1.1%, led by FX weakness (-1.9%). However, this was partially offset by stronger local-currency returns (+0.8%). Fiscal and political risks continue to drive near-term market volatility, and investors think that Bank Negara Malaysia will leave its policy rate unchanged at 1.75% throughout 2021.

Pandemic concerns in Thailand

Thailand retreated by -1.4%, with the FX element (-2.7%) outweighing the performance of local rates (+1.3%). As its COVID caseload accelerated, the government introduced new measures in pandemic hotspots. As these curbs are expected to have an economic and mobility impact, investors continue to believe that the Bank of Thailand will leave its policy rate unchanged at an all-time low of 0.5% over the next 12 months.

Weak growth and COVID restrictions

Philippines was the worst-performing market last month, with a return of -2.3%. This was chiefly driven by a significant weakening of the FX element (-3.0%). Growth and inflation in the country have been soft, with incessant COVID-19 outbreaks coupled with shutdowns. The latest development will see Metropolitan Manila re-enter Enhanced Community Quarantine from 6-20 August. As such, the central bank’s priority remains unchanged: provide support to households, and SMEs hit by the pandemic and revive growth. Therefore,  it is unlikely to normalize its policies in the near term.