Asian Bond Prices Edge Higher Amid Divergent Inflationary Trends

Against a backdrop of modest currency declines and disparate inflationary moves, Asian bond yields moved broadly lower in June 2024, matching the falls recorded in other global markets.

Asian bond prices rose for a second consecutive month in June 2024, with the Markit iBoxx ABF Pan-Asia Index returning +1.23% on a US-dollar (USD) hedged basis. Asian currencies witnessed a modest decline compared to the USD, and the unhedged return was slightly lower at +0.9%. Conversely, Asian 10-year bond yields, on average, fell by 13 basis points, with the magnitude of the drop in-line with global bond markets.

Unlike in previous months, which saw more considerable divergence, yields fell across the board in Asian markets. The exception was Indonesia, where yields were up by 14 basis points due to stronger-than-expected inflation. South Korea and Hong Kong experienced the largest drop in 10-year yields (-31 basis points) due to weaker-than-anticipated consumer price rises and economic data releases.

Notably, consumer inflationary trends remained disparate across the region, as prices continued to decline in South Korea and Hong Kong but rose in Thailand, Malaysia and the Philippines. Meanwhile, the pattern of price rises was rangebound in China, Singapore and Indonesia. Notably, China’s 10-year yield maintained a downward trajectory, making fresh multi-decade lows after the issuance of the special sovereign bonds.

Unexpectedly Large Drop in South Korea’s Long-Term Yields

South Korea (USD unhedged: +2.9%) was the best-performing market in the Markit iBoxx ABF Pan-Asia Index, delivering +2.3% in Korean won terms as the 10-year bond yield fell by 31 basis points (with positive price and income components). Consumer inflation declined more than expected, from 2.9% to 2.7%. On aggregate, economic data releases remained mixed, with the manufacturing Purchasing Managers' Index (PMI) survey returning to expansionary territory, driven by new orders and factory output. Market participants expect the rate-cutting cycle to start towards the end of 2024 as inflation falls within the central bank’s annual target range of 2%.

Weak Economic Data Sees Bond Prices Rise in Hong Kong

Hong Kong (USD unhedged: +1.3%) saw 10-year yields decline by 31 basis points in June 2024, leading to a positive Hong Kong-dollar return of 1.2%. Consumer inflation rate edged up from 1.1% to 1.2%, which was less than the anticipated 1.3%. Economic data remained weak, with retail sales significantly below expectations, and industrial production for the first quarter of 2024 moving lower. In turn, this triggered downward pressure on long-term bond yields. The Hong Kong Monetary Authority kept interest rates unchanged, in line with US Federal Reserve policy, guiding that the interbank rate may continue to be ‘high’ for some time.

Inflation Persists but Remains Within the Central Bank’s Range

Philippines (USD unhedged: +0.9%) posted a positive return of 1% in Philippine-peso terms, as the 10-year bond yield declined by 16 basis points. Consumer inflation in May 2024 increased from 3.8% in the previous month to 3.9%, which was lower than the predicted 4%. Bangko Sentral Ng Pilipinas (BSP) kept its benchmark interest rate unchanged at 6.5%, in line with market expectations. Despite consumer inflation’s rising trend, BSP Governor Eli Remolona kept the door open for a rate cut in the third quarter of 2024, as price rises, on average, remained within the central bank’s target range of 2% to 4% in the first five months of 2024.

Softer Retail Activity in Singapore

Singapore (USD unhedged: +0.8%) was up by +1.2% in Singapore-dollar terms. This was driven by a 15 basis-point decrease in the 10-year bond yield in June 2024 (with positive price and income components). Consumer inflation climbed from 2.7% to 3.1%, which aligned with market expectations. Other key economic data releases were lower than anticipated, with softer industrial production and year-on-year retail sales.

Broadly Robust Economic Newsflow in Thailand

Thailand (USD unhedged: +0.7%) witnessed a 14-basis point fall in the 10-year yield in June 2024, leading to a 0.8% Thai baht return (with positive price and income components). Consumer inflation remained on an uptrend, rising from 0.2% in April 2024 to 1.5% in May 2024, which exceeded the market’s forecast of 1.2% and took the rate of price increases back within the central bank’s 1%-3% range. Economic data releases were, on aggregate, strong as the trade balance, the manufacturing PMI survey and car sales improved. At its policy meeting in June 2024, the Bank of Thailand maintained the key policy rate at 2.5%, as widely expected, notwithstanding government calls to lower interest rates.

China’s 10-Year Bond Yield Touches a Record Low

China (USD unhedged: +0.7%) recorded a positive return of 1% in Chinese-yuan terms, as the 10-year bond yield fell by 11 basis points to reach a new all-time low of 2.21%. Consumer inflation was unchanged at 0.3%. Other key economic data releases were, on aggregate, below market expectations, especially imports and industrial production, while retail sales were slightly stronger than anticipated. Notably, new home prices in the top 70 cities were down by 4.3% compared to a year ago, the biggest fall since 2014, while new loans also saw a significant drop. At its policy meeting in June 2024, the People’s Bank of China (PBoC) kept interest rates unchanged. However, in a notable announcement, the PBOC also revealed that it would start trading in the secondary bond market following interest-rate risk concerns and maturity mismatches in non-bank financial institutions' medium- and long-term bond.

Malaysia’s Manufacturing Activity Improves

Malaysia (USD unhedged: +0.1%) gained 0.4% in Malaysian ringgit terms, and the 10-year bond yield was essentially unchanged with a positive income return. Consumer inflation stood at 2%, a notch above the market’s estimate of 1.9%. Meanwhile, the manufacturing PMI survey crossed into expansionary territory for the first time since the third quarter of 2022, although industrial production was slightly below expectations. With consumer inflation on a modestly rising trend, market participants expect Bank Negara Malaysia to maintain interest rates at current levels for a prolonged period (at least until 2026).

Indonesia’s Central Bank Steps in to Ease Currency Volatility

Indonesia (USD unhedged: -1.1%) delivered the weakest return in the Markit iBoxx ABF Pan-Asia Index (-0.2% in Indonesian rupiah terms), with the 10-year yield rising by 14 basis points in June 2024. This was in contrast to the declining yields witnessed across other Asian markets. Consumer inflation fell by more than expected (from 2.8% to 2.5% versus the market’s forecast of 2.7%) with lower prices across the housing and healthcare segments. Economic data releases remained mixed, with a weaker-than-predicted manufacturing PMI print and a modest decline in consumer confidence. At its policy meeting in June 2024, Bank Indonesia (BI) kept interest rates unchanged at 6.25%, as anticipated. It also intervened to reduce currency volatility after the Indonesian rupiah slipped to a near-record low. Notably, BI Governor Perry Warjiyo expects the US dollar-Indonesian rupiah pair to trade in a range of 15,700 to 16,100 versus the USD (compared to a level of 16,375 at the end of June 2024).