Insights

Policy Easing on the Horizon in Asia

In the latter half of July 2024, Asian bonds benefitted from the increasingly cautious tone adopted by financial markets. The Markit iBoxx ABF Pan-Asia Index returned +1.73% on a US-dollar-hedged basis as Asian bond yields, on average, fell by 23 basis points, the most significant monthly decline in 2024 and the most since December 2023. Asian currencies also strengthened against the US dollar, adding to the gains of the unhedged index. Overall, the Markit iBoxx ABF Pan-Asia Index returned +2.53% on a US-dollar-unhedged basis.

August 22, 2024 4 min read

SSGA Fixed Income Portfolio Strategists

Ten-year benchmark yields retreated across all markets in the Markit iBoxx ABF Pan-Asia Index, with the declines especially prominent in the Philippines (46 basis points over the month), Hong Kong (41 basis points) and Singapore (33 basis points). In contrast, the falls were more modest in Thailand (nine basis points) and China (six basis points). Notably, long-term China bond yields remained at multi-decade lows, with further broad-based policy-rate cuts from the People’s Bank of China (PBOC) in July 2024 keeping bond yields on a downward trend.

Notably, consensus expectations for the US federal funds rate saw a further alteration, with nearly four rate cuts now expected by the end of 2024 (versus two at the beginning of July 2024). Weaker-than-anticipated economic data releases led to the change in the US. For instance, the unemployment rate for July 2024 declined to 4.3%, significantly higher than the cyclical low of 3.4% seen in the first half of 2023.

Notably, the commencement of a rate-cutting cycle in the US will also likely provide more headroom for Asian central banks to ease their policy rates, especially in markets where consumer inflation is falling. Market consensus expects a rate-easing cycle to commence in most territories within the Markit iBoxx ABF Pan-Asia Index, apart from Malaysia and Thailand. The market also believes that short-term interest rates will decline the most in Hong Kong, South Korea and the Philippines throughout the remainder of the year.

Market	Local Currency Bond Return	FX Return	Total Return (in USD)
Thailand	1.1%	3.3%	4.5%
Singapore	2.4%	1.2%	3.7%
Malaysia	1.0%	2.5%	3.5%
Philippines	2.4%	0.3%	2.7%
Korea	2.1%	0.0%	2.1%
Hong Kong	1.9%	0.0%	1.9%
Indonesia	1.0%	0.6%	1.7%
China	0.8%	0.6%	1.4%

Baht Appreciation Boosts the Thai Market

Thailand (USD unhedged: +4.5%) was the best-performing market in the Markit iBoxx ABF Pan-Asia Index, mainly driven by a +3.3% appreciation in the Thai baht while the long-term bond yield fell by nine basis points with positive returns from price appreciation. Consumer price inflation for June 2024 was 0.6% (versus 1.5% in May 2024), significantly lower than the predicted 1%. Other economic data releases remained mixed, on aggregate, with improvements in manufacturing but a fall in consumer confidence, car sales and the net trade balance. Market consensus does not expect a major change in the Bank of Thailand’s policy rate for the remainder of the year.

Singapore Sees a Notable Drop in its Long-Term Bond Yield

Singapore (USD unhedged: +3.7%) recorded a positive local currency return of 2.4%, the best among Asian markets. This was driven by a 33 basis point decline in the long-term bond yield, the most significant monthly drop since November 2023. The Singapore dollar also saw a 1.2% appreciation against the US dollar. Consumer price inflation eased from 3.1% in May 2024 to 2.4% in June 2024, more than the expected 2.7%. Other key economic newsflow, on aggregate, remained mixed, with manufacturing data and retail sales showing an improvement, though industrial production was weaker. The Monetary Authority of Singapore kept its policy unchanged at the July 2024 meeting with no change to the width or the level of the Singapore-dollar nominal effective exchange rate (S$NEER) policy band.

An Improving Trade Balance Helps Support the Malaysian Ringgit

Malaysia (USD unhedged: +3.5%) posted positive returns of 1% in Malaysian-ringgit terms, as the long-term bond yield fell by 15 basis points in July 2024 with positive returns across the income and price components. Of note, the Malaysian ringgit appreciated by 2.5% against the US dollar and was a key driver of returns. An improving trade balance and policy measures encouraging state-linked firms to repatriate income supported the ringgit’s rise. Consumer inflation remained unchanged at 2%, below the 2.2% expected by the market. Economic data releases were mixed in July 2024, with gross domestic product (GDP) growth for the second quarter of 2024 remaining stronger than expected. At its policy meeting, Bank Negara Malaysia kept interest rates unchanged against a backdrop of resilient economic growth and the potential for higher inflation due to fuel subsidies.

Philippines Sees a Faster-Than-Expected Drop in Inflation

Philippines (USD unhedged: +2.7%) saw the long-term bond yield decline by 46 basis points, the most since November 2023. This fuelled a 2.4% return in Philippine-peso terms (with modest appreciation also seen in the peso). Consumer inflation eased from 3.9% in May 2024 to 3.7% in June 2024, a larger drop than the market expected. Other key economic indicators remained mixed, with exports notably weaker than anticipated. The market expects Bangko Sentral ng Pilipinas to cut interest rates by nearly 50 basis points by the end of 2024.

South Korea Reports Healthy Data

South Korea (USD unhedged: +2.1%) delivered +2.1% in Korean-won terms as the long-term bond yield fell by 20 basis points. The Korean won remained broadly unchanged in July 2024. Consumer inflation eased by more than expected, from 2.7% to 2.4%. Economic data releases were strong as the manufacturing Purchasing Managers' Index (PMI) survey continued to expand, and retail sales and net trade were better than predicted. The Bank of Korea maintained the base rate at 3.5% at its policy review meeting, as widely expected. Governor Rhee Chang-Yong’s comments were cautious, with the central bank expecting inflationary pressures to remain contained even as technology exports are robust. Market consensus expects a 25 basis point rate cut by the end of 2024.

Economic Newsflow in Hong Kong Remains Muted

Hong Kong (USD unhedged: +1.9%) also saw its long-term yield decline by a significant 41 basis points in July 2024, the most since November 2023. This resulted in a Hong Kong dollar return of 1.9%. Consumer inflation edged up from 1.2% to 1.5%, surpassing the market’s expectation of 1.2%. Economic data releases remained soft as PMI data continued to contract, the trade balance was weak, and retail sales fell more than expected. However, GDP growth for the second quarter of 2024 was stronger than predicted. In step with the US Federal Reserve (Fed), the Hong Kong Monetary Authority, at its policy meeting on 1 August 2024, kept interest rates unchanged while cautioning about the pace of easing during the upcoming interest-rate cycle.

Rate-Cutting Caution in Indonesia as Capital Outflows Continue

Indonesia (USD unhedged: +1.7%) recorded a positive return of 1% in Indonesian-rupiah terms. The 10-year bond yield fell by 15 basis points in July 2024, while the rupiah gained 0.6% on broad US-dollar weakness. Consumer inflation eased from 2.8% to 2.5%, which was more than the expected 2.7%. Economic releases were, on aggregate, mixed as manufacturing PMI and trade data were weak, although auto and retail sales indicated improvement. As widely anticipated, Bank Indonesia (BI) kept interest rates unchanged at 6.25% at its July 2024 policy meeting. Despite easing pressure on the rupiah from the shift in US rate-cut expectations, Governor Perry Warjiyo provided cautious guidance on cutting interest rates against a backdrop of capital outflows. Market consensus expects BI to cut interest rates by 25 basis points by the end of 2024.

Assertive Policy Action in China

China (USD unhedged: +1.4%) bonds lagged the Markit iBoxx ABF Pan-Asia Index but still delivered positive Chinese-yuan returns as the 10-year yield declined by a modest six basis points to a new record low, while the Chinese yuan also saw a modest appreciation. Economic data releases were, on aggregate, weaker than anticipated, falling to their lowest level since the second quarter of 2023. Consumer inflation data for July 2024 was modestly stronger than predicted after low readings in June 2024. However, the manufacturing PMI survey and retail sales were surprisingly soft. In an unexpected move, the PBOC cut several major policy rates, including its one-year and five-year loan prime rates, the 7-day reverse repo rate, and the medium-term lending facility to counter deflationary forces. The large adjustments in policy should also help achieve the third plenum’s economic growth targets for 2024. Market participants expect further policy easing from the PBOC as the Fed pivots towards a rate-cutting cycle.

Footnotes

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