Text size

Asian Bond Watch: 2019 in Review

Dice symbolize the change to the new year 2020
Listen to article

This is a sponsored article from State Street Global Advisors.

Kheng-Siang Ng
Asia Pacific Head of Fixed Income
State Street Global Advisors

As we enter the final two months of 2019, we thought it would be helpful to look back and assess what has been an eventful ten months.

The year began with a focus on three key themes – slowing global growth, ongoing US-China trade tensions and the imminent tightening of the US Federal Reserve’s (Fed) monetary policy. Fast forward to November and this narrative continues to feature prominently in markets – with one significant exception being the shift in the stance of global central banks from a hawkish to a more dovish bearing and the resumption of lower for longer theme. Sounds like de javu but this time round Asian central banks are getting close to their historic lower bound of interest rates.

Extended trade tensions take a toll on growth
At the end of 2018, markets were preparing for a softer global growth outlook, on the back of the continuing trade conflict between the US and China. An expected slowdown in exports meant that Asian economic expansion was also forecast to soften. Since then, markets have experienced bouts of volatility in part due to the escalating risks of a trade war, as both the US and China engaged in a tit-for-tat dispute, applying tariffs on billions of dollars’ worth of goods from each other throughout the period. However, negotiations between the two economic giants have made some progress. The latest round of talks in October ended with the US President Donald Trump announcing that China has agreed to a “very substantial phase-one deal”.

Despite this development, the risk of a prolonged trade war remains a wild card for markets. The International Monetary Fund (IMF) cited it as a key reason for cutting its 2019 global economic growth forecast to 3%, from a 3.2% prediction in July. In the US, although first-quarter growth was not as bad as predicted, the ongoing trade tensions slowed down second-quarter GDP to 2%. China was also hit, not only by higher US import tariffs but also slowing domestic demand. It reported a 26-year low growth figure of 6% for the third quarter, down from 6.2% in the second quarter. The IMF decreased its projections for almost every major market, including Hong Kong, South Korea and Singapore.

2019 welcomes a new wave of monetary easing
The growing risk of a trade dispute and the rise of unexpectedly weak data – including the inversion of the US Treasury yield curve, which raised concerns of a recession – changed the tone of global policymakers. In December last year, markets were preparing for a gradual end of stimulus policies. However, within the first quarter itself, the Fed put rate hikes on hold, and the European Central Bank (ECB) followed its lead, signalling that interest rates would stay at record lows for longer. In July, the Fed delivered its first rate cut since 2007, followed up with a second cut in September and the latest rate cut at the end of October. In September, the ECB took rates further into negative territory, with the deposit rate cut to -0.5% from -0.4% and announced a restart of its bond-purchase programme in November.

Asian central banks, which at the start of the year had been forecast to hike rates to support weakening currencies or tackle inflation, also joined the movement to shift to an accommodative policy stance. In August, the central banks of Thailand, India and New Zealand announced surprise rate cuts, while the Bank of Indonesia delivered another unexpected rate reduction – its second one in two months. More recently, the Philippines and South Korea have followed suit, while the People’s Bank of China trimmed its reserve requirement ratio by 50 basis points.

Asian bonds in focus as negative-yielding debt pile grows
A slowing economy has pushed down bond yields across the world, so much so that US$17 trillion of bonds offer negative yields, compared with US$8.3 trillion at the end of 20181. However, this provides a strong backdrop for Asian bonds, which continue to offer a positive and higher yield compared to their peers. Adding to this is expectations for further easing from the Fed, which is supportive of bonds and currencies in the Asian region, while a dovish stance from Asian central banks can boost local fixed income markets.

Another factor likely to drive demand for this asset class is the long-term favourable market development. The Asian bond market is simultaneously becoming more liquid and mature – earlier this year (and until the end of 2020), China reached a milestone as the process of adding onshore Chinese bonds to major fixed income indices began, marking a major step in deeply integrating the market with the broader universe of global fixed income. On the back of Bloomberg Barclays bond indices including Chinese bonds into their major indices earlier this year, JP Morgan also announced that their major bond indices will start to include Chinese bonds at the end of February in 2020.

While headwinds remain, including the possibility of a negative outcome from US-China negotiations and rising political risk in some Asian countries, we believe that the softening global economy will maintain investors’ hunt for yield and Asian bonds are likely to play a vital role in the solution.

Visit www.abf-paif.com* for our latest insights and investment ideas for Asian fixed income.

1Source: Bloomberg, as of 30 August 2019.

All forms of investments carry risks, including the risk of losing the entire invested amount. Such activities may not be suitable for everyone, but past performance is not a guarantee of future results.

The information provided does not constitute investment advice and should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The views expressed in this advertisement are the views of Kheng Siang Ng through the period ended 29 October 2019 and are subject to change based on the market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance. Actual results or developments may differ materially from those projected.

The whole or any part of this work may not be reproduced, copied or transmitted. Nor can any of its contents be disclosed to third parties without SSGA’s express written consent.

Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web: www.SSGA.com*

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong • Telephone: +852 2103-0288 • Facsimile: +852 2103-0200 • Web: www.SSGA.com*

This advertisement has not been reviewed by the Securities and Futures Commission of Hong Kong (the “SFC”).

© 2019 State Street Corporation – All Rights Reserved. 2800930.1.1.APAC.RTL. Exp. Date: 10/31/2020

*This website has not been reviewed by the SFC.

This is a sponsored article from State Street Global Advisors.


Related Tags