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On the ground in Asia

Monthly Insights: Asian Fixed Income (February
2024)

Positive outlook for Asian local government bonds; fundamentals continue to support
Asian credit

By the Asian Fixed Income Team
21 March 2024

Summary— The US economy continued to exhibit resilience, prompting investors tofurther adjust their expectations of how quickly the US Federal Reserve (Fed)will move to lower interest rates. At the end of February, the benchmark 2year and 10-year US Treasury (UST) yields settled at 4.62% and 4.25%,
respectively, 41.1 basis points (bps) and 33.8 bps higher compared to endJanuary.
— We maintain a positive outlook for Asian local government bonds,
particularly India, Indonesia and Philippine bonds. In our view, thedisinflation trends in these countries should provide the Reserve Bank ofIndia, Bank Indonesia and Bangko Sentral ng Pilipinas with the flexibility toshift towards rate cuts later in the year. We expect this backdrop of a slow
but steady easing of monetary policy, coupled with reasonable growth, tobe positive for these bonds.
— Asian credits registered total returns of +0.09% in February despite credit
spreads tightening about 18 bps, as UST yields moved significantly higher.
The pressure from higher rates prompted Asian investment-grade (IG)credit to underperform Asian high-yield (HY), retreating 0.25% despite
spreads narrowing about 16 bps. Meanwhile, Asian HY credit gained 2.21%
as spreads tightened about 44 bps.
— Technically, Asia credit is expected to remain well supported with subdued
net new supply as issuers continue to access cheaper onshore funding.
Although fund flows into emerging market hard currency funds haveremained weak, demand remains robust from regional institutional
investors looking to lock in attractive yields. Nevertheless, thematerialisation of some negative risk factors may exert some wideningpressure Asia credit spreads, particularly the IG segment.

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Asian rates and FXMarket review
US Treasury (UST) bonds weaken in February
The US economy continued to exhibit resilience, prompting investors to further adjust their expectations of how
quickly the Fed will move to lower interest rates. At the beginning of the month, the Fed maintained its key policy
rate while shifting towards a more neutral bias in its statement. The Federal Open Market Committee (FOMC)
statement also tempered expectations for a rate cut in March, although it was also noted that risks to growth andinflation were becoming more balanced. The robust nonfarm payrolls report, showing employers added 353,000 jobs
at the beginning of 2024 compared to an expected 185,000, triggered a jump in UST yields. Subsequently, both theconsumer price index (CPI) and producer price index (PPI) reports exceeded consensus expectations and pushed UST
yields, particularly those of shorter-term maturities, even higher. Towards the month-end, minutes from the FOMC
meeting showed that while some Fed officials expressed optimism about recent improvements in inflation, theycollectively felt there was no urgency to reduce interest rates. At end-February, the benchmark 2-year and 10-year
UST yields settled at 4.62% and 4.25% respectively, 41.1 bps and 33.8 bps higher compared to end-January.
Chart 1: Markit iBoxx Asian Local Bond Index (ALBI)
For the month ending 29 February 2024

For the year ending 29 February 2024

ALBI

ALBI

ThailandThailandTaiwanTaiwanSouth Korea

South Korea

Singapore

Singapore

Philippines

Philippines

Malaysia

Malaysia

Indonesia

Indonesia

India

India

Hong Kong

Hong Kong

China Offshore

China Offshore

China

China
-2%

-1%

-1%

0%

Bond

FX

1%

1%

2%

-10%

-5%
Bond

0%

5%

10%

15%

FX

Source: Markit iBoxx Asian Local Currency Bond Indices, Bloomberg, 29 February 2024.

Most central banks leave policy rates unchanged; PBOC lowers the five-year loan prime rate
Monetary authorities in South Korea, India, Indonesia, Thailand and the Philippines kept their respective policy rates
unchanged in February. The Bangko Sentral ng Pilipinas (BSP) revised down its risk-adjusted CPI inflation forecasts for2024 to 3.9% from 4.2%, while slightly increasing the forecast for 2025 to 3.5% from 3.4%, noting that inflation
expectations are “more firmly anchored.” The BSP views growth momentum “to remain intact over the medium term”,
but cautioned that delayed impacts of previous monetary policy tightening could lead to a near-term slowdown.
Bank Indonesia (BI) declared that the decision to keep rates unchanged aligned with the its “pro-stability monetary
policy,” which aims to strengthen the rupiah stabilisation policy and take forward-looking steps to keep inflation on
target. The Bank of Thailand (BOT) also kept its policy rate unchanged, though not unanimously, with two members
voting to lower rates by 25 bps. The BOT stated that the domestic economy is expected to decelerate in 2024, partly
due to weakening global demand and slower growth in China. Elsewhere, the Monetary Policy Committee of theReserve Bank of India (RBI) voted five-to-one to keep the benchmark repurchase rate at 6.5%. The central bank also
opted to retain its hawkish policy stance, indicating that there is no immediate plan to reduce interest rates. In
contrast, the People's Bank of China (PBOC), in a further move to bolster the struggling housing market, lowered thefive-year loan prime rate, a key benchmark for home loans, to a new low of 3.95%.
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ON THE GROUND IN ASIA MONTHLY INSIGHTS: ASIAN FIXED INCOME (FEBRUARY 2024)

Inflation momentum declines in January
Annualised headline inflation readings in the region eased in January. Singapore saw a decrease in headline inflation
to 2.9% year-on-year (YoY) in January from 3.7% in December, attributed to easing accommodation and privatetransport prices, alongside softer core inflation. Indonesia recorded a slowdown in headline inflation to 2.57% YoY in
January from 2.61% in December, with core inflation also moderating to 1.68% YoY from 1.80%. In the Philippines,
inflation decelerated for the fourth consecutive month in January, with the headline CPI dropping to 2.8% from 3.9%
in December and core inflation decreasing to 3.8% from 4.4% over the same period. Meanwhile, Thailand’s inflation
rate fell further into negative territory, reaching -1.11% YoY in January. This marked a more pronounced decline from
December’s -0.83%; it was also below consensus expectations, moving further from the BOT’s target range of 1–3%.
The drop in the inflation rate was driven by energy prices, although costs of raw food and transportation also
continued declining.
Singapore and India present budgets for the coming fiscal year; Indonesia holds peaceful elections
Singapore’s Deputy Prime Minister and Minister for Finance Lawrence Wong announced that Singapore’s overall fiscal
balance is expected to return to a small surplus of SGD 0.8 billion, or 0.1% of GDP in fiscal year (FY) 2024 (which begins
in April), following a deficit in FY2023. In India, Finance Minister Nirmala Sitharaman reaffirmed the government’s
commitment to fiscal consolidation in her Interim Budget speech. The fiscal deficit estimate for FY2024 was revised
to 5.8% of GDP, down from the 5.9% estimated in the previous year’s budget. Additionally, the fiscal deficit for FY2025
has been projected at 5.1%.
In Indonesia, unofficial presidential election tallies indicated a decisive victory for Prabowo Subianto, paving the way
for him to replace the current president, Joko Widodo. The elections results were well-received by markets, whichanticipated policy continuity as Prabowo pledged to uphold Widodo’s policies.
Market outlook
Remain positive on India, Indonesia and Philippine bonds
We maintain a positive outlook for Asian local government bonds. The anticipated decrease in yields in developed
bond markets, as major central banks, including the Fed, pivot towards rate cuts amid easing inflationary pressures,
coupled with enhanced foreign inflows, is expected to bolster demand for Asian bonds.
We anticipate the disinflation trend in India, Indonesia and the Philippines to persist. In our opinion, this should
provide the RBI, BI and BSP with the flexibility to shift towards rate cuts later in the year. We see a backdrop of a slow
but steady easing of monetary policy, coupled with reasonable growth, which should be positive for India, Indonesia
and Philippine local currency bonds. Additionally, the attractive real yields of these bonds relative to their regional
peers should further support demand.

Asian credits
Market review
Asian credit spreads tighten further in February
Asian credits registered total returns of +0.09% in February despite credit spreads tightening about 18 bps, as UST
yields moved significantly higher. The pressure from higher rates prompted Asian IG credit to underperform Asian HY(as a whole the former has longer duration than the latter and are thus more vulnerable to rising UST yields); Asian IG
retreated 0.25% despite spreads narrowing about 16 bps. Meanwhile, Asian HY credit gained 2.21% as spreads
tightened about 44 bps.
Asian credit spreads tightened steadily in the month, buoyed by positive global risk sentiment and Chinese
policymakers’ decision to amplify macroeconomic policy support. The continued resilience of the US economy, alongwith encouraging corporate earnings in the US and Europe, supported a global risk-on sentiment. In China,
policymakers took steps to bolster the struggling housing market and support the weak economy. Thousands ofresidential property projects were added to the “Project Whitelist” by city governments and were recommended tobanks for financial support. Additionally, the PBOC lowered the five-year loan prime rate, a key benchmark for homeloans, to a new low of 3.95%, and Chinese Premier Li Qiang called for “pragmatic and forceful” action to boost
confidence in the economy. Regulators also moved to further stabilise equity markets by cracking down on highYOUR GOALS, OUR COMMITMENT.

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ON THE GROUND IN ASIA MONTHLY INSIGHTS: ASIAN FIXED INCOME (FEBRUARY 2024)

frequency trading. Positive indications of stabilisation in consumer spending demonstrated by consumer activity
during the Lunar New Year holidays further supported Chinese credits. In Hong Kong, the government unexpectedly
announced the removal of all property cooling measures with immediate effect to boost its ailing property market.
Hong Kong property-related credits reacted positively to the news. In Indonesia, the markets responded positively tothe likelihood of a decisive victory for Prabowo Subianto in the presidential election.
Separately, Asia corporate earnings reported thus far continued to support robust credit fundamentals. The services
industry in hospitality, retail and consumer sectors have reported strong results, indicating firm consumption in theregion. Technology hardware companies continued to signal sequential improvements as industry de-stocking
pressure eased. Banks, on the whole, also demonstrated strong profitability, robust capitalisation and benign nonperforming loan conditions. Selected Hong Kong banks with commercial real estate exposure in Hong Kong andmainland China have reported deteriorating asset quality but capital buffers remain strong. Commodity firms
recorded lower earnings, reflective of weaker commodity prices, but their credit profiles remain strong following
years of deleveraging and muted capital expenditure spending. Meanwhile, China's property contracted sales
continue to decline amid weak confidence and sentiment onshore over big-ticket items.
Overall, spreads for all major country segments tightened in February. Macau credits outperformed, with spreads
narrowing by about 41 bps, following a jump in mainland Chinese tourist arrivals during the Lunar New Year holidays.
The solid performance of Indian credits was supported by idiosyncratic news and decent results from companies,
along with a solid macroeconomic backdrop.
Primary market activity moderates due to the Lunar New Year holidays
Activity in the primary market quietened down in February as Asia celebrated the Lunar New Year holidays. The IG
space saw just nine new issues amounting to USD 5.85 billion, including the USD 3.0 billion two-tranche quasisovereign issue from Korea Development Bank. Meanwhile, the HY space saw just one new issue amounting to USD
68 million.
Chart 2: JP Morgan Asia Credit Index (JACI)
Index rebased to 100 at 28 February 2023
108
106
104
102
100
98
96
94
92
90

JACI

JACI Investment Grade

JACI High Yield

Note: Returns in USD. Past performance is not necessarily indicative of future performance.
Source: Bloomberg, 29 February 2024.

Market outlook
Supportive Asia credit fundamentals and strong technicals, but tight valuation calls for cautious positioning
The fundamentals backdrop for Asian credit remains supportive. In China, the recent step-up in fiscal measuressuggests that policy makers are aware of the challenging environment. This further supports expectations for Chinese
policymakers to deliver additional measures to help revive confidence in the economy and broaden out the recovery
in 2024. The 5-11 March National People’s Congress was closely watched for policy direction and continuation.
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ON THE GROUND IN ASIA MONTHLY INSIGHTS: ASIAN FIXED INCOME (FEBRUARY 2024)

Meanwhile, macroeconomic and corporate credit fundamentals across Asia ex-China are expected to stay resilientwith a recovery in exports growth potentially offsetting softer domestic conditions. While non-financial corporates
may experience a slight weakening in leverage and interest coverage ratios stemming from lower earnings growthand incrementally higher funding costs, we believe there is adequate ratings buffer for most, especially the IG
corporates. Asian banking systems remain robust, with stable deposit base, robust capitalisation and strong preprovision profitability providing buffers against moderately higher credit costs ahead.
Technically, Asia credit is expected to remain well supported with subdued net new supply as issuers continue toaccess cheaper onshore funding. Although fund flows into emerging market hard currency funds have remained
weak, demand remains robust from regional institutional investors looking to lock in attractive yields. Nevertheless,following the sharp rally in recent months, these positive factors have been largely priced in, and the materialisationof some negative risk factors such as a weaker-than-expected global economy, as well as local political uncertainties
and geopolitical tensions, may exert some widening pressure on Asia credit spreads, particularly the IG segment.

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