China Government Bonds (CGB)

▪ Foreign investors reduced their holdings of China’s onshore bonds once again in January, partly due to generally weak global demand for bonds, as well as shifting risk appetites that attracted investment into Chinese equities and away from the debt market. The International Institute of Finance reported a USD2.5b outflow from China's bond market in January (Dec: USD5.1b inflow) compared to USD17.6b worth of inflows into equities.

▪ In the near-term, Chinese sovereigns will face dual pressures from weak global demand and a shift towards riskier assets domestically. Tepid global demand coincides with a change in market expectations for the US Fed's policy direction, which may remain hawkish due to strong job figures and sticky inflationary pressures. As such, we expect CGB yields to trend slightly higher this month, but the People's Bank of China's accommodative monetary policy should partly keep yields in check.

Japan Government Bonds (JGB)

▪ The 10Y JGB yield repeatedly exceeded the Bank of Japan's (BoJ) upper limit in February sessions, as investors continued to challenge the effectiveness of the Yield Curve Control (YCC) policy and anticipated that it would be abolished after Kazuo Ueda assumes the role of governor in April. The situation was worsened by rising global bond yields, spurred by a surge in US Treasury yields, which prompted the BoJ to intervene in the market with another round of emergency bond buying.

▪ We think that it is unlikely that Kazuo Ueda will upend the ultraloose policy immediately after his induction in April. The incoming BoJ governor emphasized that the central bank would pursue policy normalization only after observing continuous progress towards achieving its long-term inflation target; Ueda highlighted that trend inflation was currently “above zero but short of the 2.0% target”. That said, we still expect the BoJ to widen the YCC target band by at least 25 bps later in 2H23.

Indonesia Government Bonds (IGB)

▪ In February, IGB yields increased amid weak global demand for bonds, as markets anticipated prolonged hawkishness from the Fed. However, the pressure on IGBs was likely limited by Bank Indonesia's decision to pause rate hikes and maintain the benchmark policy rate at 5.75%. Consequently, IGB yields did not increase as quickly as their developed market counterparts.

▪ IGB yields may trend slightly higher in the near-term, steered by rising global bond yields but capped by Bank Indonesia’s shift towards a neutral stance. Furthermore, despite broad weakness among Asian government bonds, IGBs remain the most attractive among its regional market peers due to significantly higher yields, which may help them to perform relatively well.

Thailand Government Bonds (TGB)

▪ The 10Y TGB yield increased slightly by 2.2 bps to 2.586%, taking cues from rising global bond yields, and probably driven by foreign selling. Then again, domestic demand may have sustained as markets brace for the Bank of Thailand (BoT) to finish hiking.

▪ In the near-term, TGB yields may only rise slightly higher as the BoT will likely complete its tightening cycle at its next meeting (Mar 31), bringing the repurchase rate to its long-term average of 1.75%.

Source: Kenanga Research - 1 Mar 2023