China Government Bonds (CGB)

▪ CGB yields increased in July, as foreigners likely continued to sell Chinese sovereigns amid a weak economic recovery and looser monetary policy. The Institute of International Finance reported that foreign investors were net sellers of Chinese debt for the sixth straight month in June (USD1.6b; May: USD4.2b).

▪ Following China's Politburo meeting last week, where the country's economic recovery was described as "tortuous," new data continued to underwhelm. The official composite PMI slipped further in June (51.1; May: 52.3), and non-manufacturing activity slowed to its weakest level this year. As a result, foreign outflows from China's debt market will likely persist until new stimulus measures set the country's economic recovery back on track.

Japan Government Bonds (JGB)

▪ JGBs fell under immediate pressure following the BoJ’s monetary policy meeting, after the central bank opted to adjust the conduct of the Yield Curve Control (YCC) without directly expanding the target band or abolishing it entirely. The BoJ clarified that it intended to buy the 10Y JGB should it reach 1.0% but maintained the official target band between - 0.5% to 0.5%, highlighting that this new reference point would allow for greater flexibility in managing the bond market and transmitting monetary policy. This unexpected move surprised markets, leading to higher JGB yields across the board, with the 10Y JGB yield reaching a nine-year high.

▪ In August, we anticipate that JGB yields will continue trending higher as markets test the YCC’s new effective limit of 1.0%. That said, we maintain our target of the 10Y JGB yield reaching 0.75% by end-3Q23, as we believe domestic demand for Japanese sovereigns will remain strong. Local investors are likely to reposition domestically, finding yields relatively more attractive after years of suppression. Furthermore, we interpret the BoJ’s recent move as a step towards monetary policy normalisation, which could lead to another YCC adjustment later this year and the potential end of negative interest rate policy in 2024.

Indonesia Government Bonds (IGB)

▪ IGBs experienced reduced demand in July as global sentiment turned risk-off amid the US Fed’s 25 bps rate hike to 5.50%. This contrasts with Bank Indonesia’s (BI) decision to keep the policy rate unchanged at 5.75% after headline inflation fell back to within its target range of 2.0% - 4.0% in June. Indonesian govvies encountered some pressure due to narrowing policy rates and yield differentials against developed market bonds, but they remained more attractive than all their regional counterparts.

▪ For August, we expect IGB yields to return to a downtrend due to improving global risk sentiment, as markets continue to adjust to the expectation that the Fed has concluded its tightening cycle. Likewise, we maintain our projection that the Indonesian central bank will pivot in 1Q24 prompted by a similar move by its US counterpart.

Thailand Government Bonds (TGB)

▪ In July, TGBs continued to experience selling pressure due to the ongoing political impasse in Thailand. The election-winning Move Forward party failed twice last month to find enough support in the Senate to appoint its leader as the Prime Minister.

▪ TGBs yields will likely continue to rise in August amid the persistent political uncertainty and upcoming BoT monetary policy meeting. The Move Forward party has made way for the election runner-up and its alliance partner Pheu Thai to attempt to form the next government, but considerable obstacles remain due to the military-appointed Senate. Moreover, the BoT is expected to raise the policy rate by another 25 bps to 2.25% this week (August 2), which will likely push bond yields higher.

Source: Kenanga Research - 1 Aug 2023