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Recovery Prospects Weigh on Asia’s Bond Markets

Rising optimism on global growth and implications for the timing of policy normalization has put emerging Asia bond markets under pressure over the month, in conjunction with other major developed government bond markets as well. Investors are now demanding higher term premium from bonds, as inflation expectations are set to average higher in the near term, primarily due to higher oil prices and base effects, and also demand more risk premia for allocating to emerging markets, as they find higher real yields in the United States (US).


SSGA Fixed Income Portfolio Strategists


April 23, 2021


Asia’s bond markets remained in negative territory in March. The Markit iBoxx ABF Pan-Asia Index was down by 2.36% in US dollar (USD) terms on an unhedged basis, and 0.95% on a USD hedged basis. Losses were recorded across the board, with Thailand the worst performer and Hong Kong the strongest.

Land of Smiles Upturned by Vaccine Delays

Thailand fell -5.76% as foreign exchange (FX) (-3.84%) and local-currency bonds (-2.0%) crimped returns. A national vaccination drive was delayed, and with it hopes that borders would reopen to international visitors. The tourism void has led to a sharp fall in growth, given it contributes around 20% of the country’s gross domestic product (GDP). A rise in COVID-19 infections and new restrictions will likely affect first-quarter 2021 figures. That said, the Bank of Thailand is expected to hold its policy rate at 0.50% over the medium term.

Limited Central-Bank Options Constrain Malaysia

Malaysia was one of the worst performers returning -3.95%, with FX (-2.47%) and bonds (-1.52%) declining. The central bank's limited ability to cut rates, political risks, and a weak growth outlook have combined to keep the Malaysian Ringgit in check. Indeed, investors are now demanding more term-premium (the difference between what you would earn from longer-term holdings compared to short-term investments) from bonds, as inflation is set to rise on higher oil prices, among other factors.

Pricing in a Recovery

Next door in Singapore, bonds lost -3.65% over the month. Prices remained under pressure given rising optimism around global growth and expectations for a return to more ‘normal’ economic policies. The government's COVID-19 vaccination programme also appears to be on track. Market participants expect the Singapore dollar to gradually appreciate if international travel and activity resume ahead of expectations. In turn, this should help to counter inflationary pressures.

An Eye on Inflation

Inflation was also a buzzword in the Philippines, where markets slipped -3.65%, mainly from a sell-off in local bonds (-3.47%). Investors demanded more risk premia in the form of yield as inflation climbed. Philippine headline inflation recently breached the central bank’s 2%-4% target, marking the end of a period of easing. Policymakers had cut the lending rate to an all-time low of 2% via a cumulative 200 basis points in reductions.

Indonesia Softens Rate-Cut Expectations

Indonesia’s bonds returned -2.45% over the month, with a weaker FX element (-2.13%) playing a significant role. An unsupportive global backdrop has exacerbated an already challenging supply-and-demand environment. This has consequently impacted foreign-investor demand. Market participants expect Bank Indonesia to maintain its policy rate at 3.5%. The institution’s governor Perry Warjiyo appears to be downplaying the prospect of further rate cuts by admitting that the room for a reduction was becoming more limited.

No Memory Loss in Korea

Meanwhile, Korea’s bond markets returned -1.37% over the month, as local-currency bonds (-0.65%) and FX (-0.73%) dragged on returns. The market sold off on expectations of a more substantial economic rebound in 2021. This was fuelled by a turnaround in the memory-chip market, an effective vaccine roll-out plan, and a healthier supply of longer-dated issues.

Currency Weakness in China

China’s bonds fell by 0.49% over the month. The renminbi retreated -1.41% to reach a four-month low against the dollar, as the prospects of a solid economic recovery in the US driven by a fast-track vaccination programme and massive fiscal stimulus underpinned the greenback.

Hong Kong Relatively Robust

Hong Kong bonds eased -0.46% in March, with dips in local currency bonds (-0.23%) and FX (-0.22%). Hong Kong’s economy has contracted for six straight quarters. Tepid retail sales and consumer-facing services figures coupled with flush liquidity conditions and favourable supply-and-demand conditions mean that the market has not experienced the same sell-off as its overseas counterparts.