Navigating Asia’s Contrasting Bond Yield Environment

Government bond yields across Asia have risen but they are not uniformly high. We look more closely at the region’s economic backdrop to find out more. 

The yield on government bonds varies considerably across Asia, which is not unexpected in such a diverse region. Generally, bond yields in most markets are higher than in the past few years.

Bond yields are ultimately determined by investor demand. This is affected by the outlook for a particular economy and expectations of what monetary policy course will be followed. External factors also play a significant role, although larger economies like China and Japan can, to a certain extent, set their own course regarding policy management.

The broad increase in Asian bond yields has been driven by central banks raising interest rates to ensure that inflation remains under control and their currencies are protected against excessive devaluation. Yet, as noted above, the picture is not uniform, with South Korea and Singapore keeping interest rates unchanged. At the same time, Thailand, Malaysia, Indonesia, and the Philippines all tightened monetary policy by raising the cost of borrowing.¹

However, China and Vietnam have seen bond yields go against the trend and move lower.² In both cases, part of the reason for this was an attempt to support a troubled real estate sector.³ This decline in yields has also been driven by investors seeking the relative safety of government bonds in the face of disinflation.⁴  

Is China on Course for Deflation?

Many commentators have also pointed to similarities between China’s economy in 2024 and Japan’s in the 1990s. At that time, Japan fell into a deflationary spiral caused by a decline in demand. This was underpinned by a deflating real estate bubble, a debt overhang, and a deteriorating demographic outlook.⁵  Trade tensions with the US also affected Japan in the 1990s, which is not unlike the present situation with China. In the 1990s, consumers in Japan also expected prices to decline, meaning they delayed purchases. The effect of this deferral was a further decrease in demand. A similar scenario is occurring in China, as companies cut prices to attract customers.⁶ As a result, consumer prices recently fell by the most in 14 years, with a 0.8% year-on-year dip in January 2024.⁷

China’s Bond Market is Dominated by Long-Term Domestic Investors

China also grapples with a troubled property development sector and a sluggish domestic economy.⁸ Like Japan then and China now, while debt levels are relatively high on a GDP basis, the debt is mainly held domestically and priced in local currency. This means there is less likely to be a situation where foreign investors rush to withdraw their capital.

Age Before Wealth?

While there are similarities between these two markets, there are also some considerable differences. One significant variation is that Japan back then was relatively wealthier (on a per capita basis) than China is now. A phrase used by some commentators: Japan got rich before it got old neatly summarises this difference.⁹ China’s ageing society and relatively lower birth rate means it has less of a cushion to help manage the transition to a more measured pace of growth while keeping any economic upheaval to a minimum.¹⁰

Varied Policy Levers to Support the Economy

Despite this uncertain backdrop, there are some positive factors to consider. Most notably, China’s government has various policy levers at its disposal that give it far more leeway than some of the smaller markets in the region to provide support.

For instance, the government has undertaken stimulus and fiscal measures to help strengthen the economy. These steps include reducing the prime five-year loan interest rate and cutting the reserve requirement ratio,¹¹ which enables banks to lend more. The authorities also provided low-interest loans to policy banks through a mechanism called the pledged supplementary facility.¹²

What Is the Outlook for Asian Bonds in 2024?

Asian bonds have experienced strong inflows from overseas investors in recent months, as relatively attractive yields and a resilient export performance from many economies prove attractive.¹³ The US Federal Reserve's actions regarding the pace and magnitude of interest rate cuts during the remainder of the year will play a significant role in the pathway for yields.¹⁴ When, or if, the US central bank trims borrowing costs, this will also help central banks in Asia to reduce their interest rates.