China Government Bonds (CGB)

▪ CGB yields fell in April on renewed demand, prompted by a strong 1Q23 GDP reading (4.5%; 4Q22: 2.9%) and on expectations of sustained accommodative policy by the PBoC. This comes off the back of a softer-than-expected headline inflation print for March (0.7%; Feb: 1.0%), indicating more space for the central bank to continue supporting China’s burgeoning recovery.

▪ Chinese govvies may continue to draw some foreign demand in the near-term as investors look for safety, having recorded a marginal net capital inflow in March of CNY3.5b compared to a large CNY76.4b outflow in February. However, CGB’s may be hampered in the long-term by relatively unattractive yields and a potential resurgence in global risk-on sentiment in 2H23.

Japan Government Bonds (JGB)

▪ JGBs weakened considerably leading up to the BoJ’s latest monetary policy meeting, with the 10Y yield nearing the 0.5% limit, but recovered after Governor Kazuo Ueda kept the policy rate unchanged and maintained the central banks ultra-loose stance. Nonetheless, the BoJ raised its core inflation forecast for 2023 to 2.5% and dropped its commitment to keep policy rates at current levels; instead, opting to conduct “a broad-perspective review of monetary policy” for up to one-and-a-half years.

▪ JGB yields will likely remain on an uptrend in May, with the 10Y JGB to fluctuate between 0.4% - 0.5% as the lack of foreign demand worsens, especially if the US Fed shows signs of dovishness at its upcoming meeting. In the long-term, we still expect the BoJ to revise yield curve controls as part of its policy review and expand the target band by at least 25 bps in 3Q23.

Indonesia Government Bonds (IGB)

▪ IGB yields continued to trend lower in April amid strong foreign demand, spurred by expectations of a US recession and a dovish pivot by the US Fed. Indonesian sovereigns also benefitted from the clear end of Bank Indonesia’s tightening cycle and the further easing of headline inflation in March (4.97%; Feb: 5.47%).

▪ IGBs should continue to attract strong foreign demand going forward, supported by very high yields, a robust domestic economic outlook, and further easing of inflationary pressures; headline inflation reached an 11-month low in April (4.33%).

Thailand Government Bonds (TGB)

▪ In April, TGB yields increased due to weaker demand ahead of the Thai general election. Foreign demand was dampened by the election scheduled for May 14, with recent polls showing strong popularity for the opposition party, Pheu Thai, which could potentially result in a change of government. The uncertainty surrounding the election has offset positive sentiment over Thailand’s strong economic momentum, with consumer confidence reaching a three-year high in March (53.8; Feb: 52.6) on a sustained recovery in tourism and sizeable election spending.

▪ We expect TGB yields to continue rising in May amid elevated political uncertainty and for foreign demand to weaken should there be any issues with the transition of power. TGB’s may then recover in the medium-term with the BoT increasingly likely to complete its tightening cycle, especially after headline inflation eased more-than-expected in March (2.8%; Feb: 3.8%), returning to the 1.0% – 3.0% target range for the first time in 15 months.

Source: Kenanga Research - 3 May 2023