PERSPECTIVE3-5 min to read

Year Ahead 2024: Asian Bonds

Investment Director - Asia Fixed Income, Chris Wong, discusses themes that could drive Asian bond markets for 2024 and explores the key opportunities that the team see within the Asian bond universe.

12/12/2023

Authors

Chris Wong
Investment Director, Asia Fixed Income

Drivers of Asian bond markets over 2023

Global government bond yields continued to surge over 2023 due to hawkish central banks which have kept raising interest rates to tame inflation. While inflation in the US has moderated notably from the peak reached last year, we’ve seen signs of this slowing.

The US dollar has remained strong, a key headwind for Asian bonds and local currencies. The slower-than-expected growth in China and geopolitical tension in the Middle East are two other key themes that weighed on risk sentiment.

Key themes expected to drive Asian bond markets in 2024*

Looking ahead, we see three key drivers that will likely shape the market landscape in 2024.

  1. First, there is scope for bond yields to come down. As the lagged effects of monetary tightening continue to feed through to the US economy, that would allow the US Federal Reserve to pause or even cut rates sometime next year, a big positive for fixed income investments.
  2. Second, we expect the US dollar to turn weaker. The dollar has been supported by strong growth in the US and elevated Federal Fund Rates. As the US tightening cycle is drawing to an end, we expect dollar strength to reverse, lending support to Asian bonds.
  3. Third, the slowing growth in China will likely bottom out. A lot has been done by the government to support the economy to support the economy, such as policy rate cuts, loosening of home purchase restrictions and raising the government’s budget deficit. We believe these stimulus measures will help stabilise growth and boost the overall sentiment towards Asia.

Key opportunities for Asian bond investors in 2024*

The bond markets are now offering more attractive opportunities than we have seen in previous years. With the US Federal Reserve having reached peak hawkishness, we find Asian government bonds particularly attractive as they will not only benefit from lower US Treasury yields, but also a softer US dollar.

One government bond market that we have high conviction on is Indonesia, which has strong macro fundamentals and offers attractive real yields. The country has lower government debt burden relative to other Asian peers and stands to benefit from favourable demographics and increased Foreign Direct Investment.

As for hard currency credits in Asia, we continue to prefer Investment Grade over High Yield, and see interesting opportunities in selected industries such as financials, Chinese internet platforms, and Indian renewable energy.                          

* For illustrative purposes only and does not constitute any recommendations to invest in the mentioned sectors/countries.

Authors

Chris Wong
Investment Director, Asia Fixed Income

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