Insights

Asian Bonds Rise as Policy Easing Accelerates

Asian bonds delivered robust returns for a third consecutive month, with the Markit iBoxx ABF Pan-Asia Index rising by +3.2% in US-dollar-unhedged terms in September 2024 and +10.1% in the third quarter of 2024 (the quarter). Like August, Asian currency appreciation versus the US dollar was the primary driver of returns during the month (+2.0%). This followed a larger-than-expected 50 basis point reduction in the US federal funds rate at the September 2024 US Federal Reserve (Fed) policy meeting. The market now expects two additional 25 basis point cuts by December 2024 and possibly five cuts by mid-2025.

SSGA Fixed Income Portfolio Strategists

October 30, 2024 3 min read

The index also delivered positive returns on a USD-hedged basis (+1.2%) as Asian 10-year bond yields fell by an average of 11 basis points in September 2024 and a significant 42 basis points over the quarter. Bond yields fell the most in the Philippines and Hong Kong during the quarter (76 basis points each), followed by Indonesia (61 basis points) and Singapore (59 basis points).

In contrast, yield levels remained unchanged in China over the quarter amid growing optimism about the economic outlook following the announcement of wide-ranging monetary stimulus measures. Encompassing interest rate and mortgage rate cuts, these were cited as the most significant moves since the COVID crisis.

With US dollar strength no longer a headwind, most other Asian central banks are expected to switch to or maintain an accommodative monetary policy stance. Indeed, central banks in the Philippines, Hong Kong and Indonesia have already started their easing cycles in Q3 2024, while those in Thailand and South Korea have started their rate reduction cycle in October 2024.

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Thailand	0.9%	5.4%	6.4%
Malaysia	0.4%	5.1%	5.5%
Indonesia	1.3%	2.1%	3.5%
Korea	1.2%	2.2%	3.3%
Singapore	1.3%	1.8%	3.1%
Philippines	2.7%	0.3%	3.0%
China	0.4%	1.1%	1.5%
Hong Kong	0.7%	0.4%	1.1%

Thai Manufacturing Data Continues to Improve

Thailand (USD unhedged:+6.4%) rose by +0.9% in Thai baht terms, as the 10-year bond yield fell by eight basis points and the Thai baht gained nearly +5.4%, benefitting from broader US-dollar weakness. Consumer inflation in August 2024 slumped from 0.8% to 0.3% year on year. However, other economic indicators remained robust as the manufacturing purchasing managers’ index (PMI) survey improved for a fourth consecutive month, while net trade data was better than expected. Investors expect the Bank of Thailand to lower interest rates in the first quarter of 2025.

Malaysia Shows Signs of a Slowing Economy

Malaysia (USD unhedged: +5.5%) recorded a positive Malaysian ringgit return of +0.4% as the 10-year bond yield fell by five basis points amid a +5.1% appreciation in the Malaysian ringgit, which was a significant driver of the market’s return. Consumer inflation in August 2024 eased from 2% to 1.9% year on year, while other key economic indicators showed signs of a slowing economy. For instance, manufacturing data remained in contraction, net trade data disappointed and retail sales softened for a third straight month. Bank Negara Malaysia maintained its overnight policy rate at 3%, which was in line with market expectations, and investors do not expect an interest-rate cut in the near future.

Notable Appreciation in the Indonesian Rupiah

Indonesia (USD unhedged: +3.5%) delivered a +1.3% return in Indonesian rupiah terms as the 10-year bond yield fell by 19 basis points, and the rupiah saw a significant +2.1% appreciation against the US dollar. Key economic newsflow remained mixed, with consumer inflation in August 2024 remaining stable at 2.12% year on year, manufacturing data contracting for a third consecutive month and retail sales were strong. Bank Indonesia unexpectedly cut interest rates by 25 basis points to 6% at its September 2024 policy meeting. Governor Perry Warjiyo expressed confidence in the bank’s inflation forecast and economic growth, while US dollar strength was no longer a challenge.

Positive Economic Newsflow from South Korea

South Korea (USD unhedged: +3.3%) posted a +1.2% return in Korean won terms with a +2.2% appreciation in the Korean won. Consumer inflation in August 2024 declined sharply from 2.6% to 2% year on year, marginally more than investors expected. Other economic data indicators were strong – for instance, the manufacturing PMI survey improved, industrial production data was better than predicted, and retail sales rose by 9.2%. The Bank of Korea is expected to cut its interest rate in the fourth quarter of 2024, with investors anticipating three 25 basis point reductions by mid-2025.

Easing Inflation in Singapore

Singapore (USD unhedged: +3.1%) registered a positive return of +1.3% in Singapore dollar terms, with its 10-year bond yield declining by nine basis points, while the Singapore dollar appreciated by +1.8%. Consumer inflation in August 2024 fell from 2.4% to 2.2% but was still marginally higher than the estimated 2.1%. Other key economic data remained mixed as the manufacturing PMI survey continued to improve while retail sales were below expectations.

Unemployment Rises in the Philippines

Philippines (USD unhedged: +3.0%) saw its 10-year bond yield fall by 29 basis points, fuelling a +2.7% return in Philippine peso terms. The Philippine peso rose by +0.3%. Consumer inflation in August 2024 eased from 4.4% to 3.3% year on year. Other economic indicators remained mixed: the manufacturing PMI survey has been steadily expanding for almost 12 months; however, unemployment rose from 3.1% to 4.7%, the highest level since July 2023. Following the interest-rate reduction in August 2024, the market expects three additional 25 basis point cuts by mid-2025.

Significant Stimulus Measures in China

China (USD unhedged: +1.5%) delivered a positive +0.4% return in Chinese yuan terms, with the 10-year yield edging higher by three basis points. On aggregate, economic data was at its weakest level since the third quarter of 2023. While exports were better than expected, retail sales, industrial production and import data were surprisingly soft. New home prices continued to decline at the fastest rate since 2015, while producer prices also indicated a strong downward momentum. The People’s Bank of China (PBOC) announced a series of wide-ranging stimulus measures in September 2024, cited as the largest since the COVID crisis. These included cuts to several key interest rates and the mortgage rate, along with 500 billion yuan of swap funding for equity purchases by institutions and 300 billion yuan of low-cost loans to commercial banks. The PBOC also pointed to a further reduction in the banks’ reserve requirement ratio soon.

Hong Kong Mirrors the Fed with Rate Cut

Hong Kong (USD unhedged: +1.1%) underperformed the Markit iBoxx ABF Pan-Asia Index in September 2024. Hong Kong dollar returns stood at +0.7%, fuelled by a 13 basis point decline in the 10-year yield. Consumer inflation for August 2024 remained steady at 2.5% year on year, compared to 1.5% at the start of the quarter. Economic data releases, on aggregate, remained weak with the manufacturing PMI survey and retail sales contracting. In line with the Fed, the Hong Kong Monetary Authority lowered its base rate by 50 basis points to 5.25% on 19 September 2024, the first reduction since 2020.

Footnotes

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