Insights

Asian Bonds Benefit from a Downward Shift in US Interest-Rate Expectations

Asian bonds were supported by changing US interest-rate expectations in August 2024, with the Markit iBoxx ABF Pan-Asia Index returning +4.11% on a US-dollar-unhedged basis. The broad appreciation in the value of Asian currencies against the US dollar was a key driver of the return (+3.15%). Regional currencies rose on expectations of a narrower difference between Asian interest rates and those in the US, as market participants factored in almost one percentage point of US Federal Reserve (Fed) rate cuts by the end of 2024 compared to 75 bps at the end of July 2024 and 50 bps at the end of June 2024.

SSGA Fixed Income Portfolio Strategists

September 25, 2024 4 min read

The index also delivered positive returns on a US-dollar-hedged basis (+0.95%), with Asian bonds benefitting from lower yields at the short and long end of the curve. On average, two- and 10-year yields in Asia fell by nine and eight basis points, respectively. Across the various markets, Indonesia (-27 basis points), Hong Kong (-22 basis points) and Singapore (-18 basis points) saw the most significant declines in 10-year yields.

At the same time, yield levels remained largely unchanged in South Korea, the Philippines and Malaysia. However, the consumer inflation rate was stronger than anticipated in several Asian markets, including China, Hong Kong and the Philippines. The Bangko Sentral Ng Pilipinas (BSP) became one of the first Asian central banks to start reducing interest rates (after China), and the market expects Indonesia, South Korea, Hong Kong and Thailand to follow suit in the upcoming quarters (alongside further easing measures in China).

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Indonesia	2.1%	5.3%	7.5%
Malaysia	0.3%	6.7%	7.0%
Thailand	0.9%	4.9%	5.8%
Philippines	1.2%	4.1%	5.3%
Singapore	1.5%	2.9%	4.4%
Korea	0.0%	3.1%	3.0%
China	0.1%	1.9%	2.0%
Hong Kong	1.3%	0.2%	1.5%

Consumer Inflation Holds Steady in Indonesia

Indonesia: Indonesia was the best-performing market in the iBoxx Pan-Asia Index in Indonesian-rupiah and US-dollar-hedged terms. The 10-year bond yield declined by a significant 27 basis points, while the Indonesian rupiah rose by nearly 5.3% amid broad-based US-dollar weakness. Consumer inflation data for July 2024 aligned with expectations, while other newsflow indicated a mixed economic backdrop. At its policy meeting, Bank Indonesia kept its interest rate unchanged at 6.25%, with Governor Warjiyo suggesting that borrowing costs could fall in the fourth quarter of 2024.

A Notable Rise in the Value of the Malaysian Ringgit

Malaysia: The Malaysian 10-year yield increased by four basis points in August 2024, leading to modest Malaysian ringgit returns. However, the Malaysian ringgit appreciated by nearly 6.7% against the US dollar despite a weaker trade and current account balance, making it the second-best performer in the index. Economic data releases were generally mixed with marginally lower than expected consumer inflation in July 2024. Market participants do not expect a significant change in Malaysia’s policy stance throughout the remainder of 2024.

Signs of a Thai Economic Recovery

Thailand: The 10-year bond yield in Thailand fell by four basis points, leading to a modest return in Thai-baht terms. However, the Thai baht rose by 4.9% in August 2024 and was the main driver of Thailand’s return in the unhedged index. Consumer inflation in July 2024 was stronger than predicted at 0.8% year on year. Other data releases indicated a more robust economic picture. At its policy meeting, the Bank of Thailand kept interest rates unchanged, as anticipated.

Philippine Central Bank Pivots to Interest Rate Cuts

Philippines: The 10-year bond yield was nearly unchanged with the return in Philippine-peso terms mainly driven by the income element. However, the Philippine peso appreciated by 4.1%, boosting the US-dollar-unhedged returns. Consumer inflation data for July 2024 was stronger than expected at 4.4% year on year (versus an anticipated 4.1% and the 3.7% witnessed in June 2024). Other economic data releases were mixed. The BSP unexpectedly cut the benchmark interest rate by 25 basis points to 6.25% at its August 2024 policy meeting, becoming one of the first Asian central banks to start easing borrowing costs after China. Notably, the Philippines has one of the highest interest rates in the region, along with Indonesia and India.

Retail Sales and Inflation Soften in Singapore

Singapore: There was a significant drop in Singapore’s 10-year bond yield, which fell by 18 basis points, leading to positive Singapore-dollar bond returns. Meanwhile, a 2.9% appreciation in the Singapore dollar further enhanced returns in US-dollar-unhedged terms. Consumer inflation data in July 2024 remained weak (2.4% year on year versus an expected 2.5%). While manufacturing data showed resilience, retail sales were significantly softer than predicted. The average monthly Singapore-dollar NEER index (based on the exchange rates between Singapore and its principal trading partners) rose from 139.37 in July 2024 to 139.48 in August 2024.

South Korean Interest-Rate Cut on the Cards

South Korea: The 10-year yield was nearly unchanged, and the return in Korean-won terms was nearly flat. The Korean won appreciated by almost 3.1%, supported by an improving current-account balance, which aided US-dollar-unhedged returns. Key economic data releases indicated a mixed picture, with consumer inflation in July 2024 marginally stronger than expected. As widely predicted, the Bank of Korea kept the base rate unchanged at 3.5% at its August 2024 meeting. However, weaker August 2024 consumer inflation data (released in early September 2024) opened the door for interest rate cuts to commence in the fourth quarter of 2024.

China Sees Continued Policy Support

China: The 10-year yield increased by three basis points but stayed near a multi-decade low, leading to only modest returns in Chinese-yuan terms. The Chinese yuan appreciated by 1.9% against the US dollar, aiding returns in US-dollar-unhedged terms. Consumer inflation data was marginally stronger than expected; however, economic surprises, on aggregate, remained on a downward trend in August, with a lower-than-expected fixed-asset investment reading and manufacturing activity surveys indicating contraction. Following the significant easing measures announced in July 2024, the People’s Bank of China (PBOC) kept interest rates unchanged in August 2024. However, the policy tone remained very accommodating, with the PBOC enhancing its toolkit recently by introducing secondary open-market bond operations to manage liquidity and asset-liability mismatches better.

Consumer Prices Move Unexpectedly Higher

Hong Kong: The 10-year yield declined by 22 basis points, which was in line with the sharp fall in global yields. This led to positive returns in Hong Kong-dollar terms. Consumer inflation in July 2024 was much stronger than predicted (2.5% versus an expected 1.6% and the 1.5% seen in June 2024), while retail sales data was weaker than anticipated. The Hong Kong Monetary Authority is expected to reduce interest rates from September 2024, which should align with the Fed.

Footnotes

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