partner content

Asian Bond Watch: Policy shifts support emerging markets debt ahead of elections

A policy U-turn by central banks bolstered bond markets in early 2019 but will key regional elections create some turbulence ahead? State Street Global Advisors’ Kheng-Siang Ng outlines how Asia’s markets are likely to react.
Asian Bond Watch: Policy shifts support emerging markets debt ahead of elections

The first quarter of 2019 revealed a marked change in the tone of developed central banks, with the US Federal Reserve (Fed) and the European Central Bank (ECB) adopting a more accommodative stance. This boosted 2019’s bond market rally, suppressed yields even further and increased the value of the global fixed income market.

Kheng-Siang Ng

However, a wave of elections, especially across Asia, could potentially trigger some volatility.


Central banks in the US and Europe have proved surprising with a more downbeat than expected outlook.

The Fed solidified its dovish policy U-turn by holding rates steady at the target range of 2.25-2.5%, scaling back its balance-sheet reduction programme, and signalling a drop in plans to hike rates again in 2019.

The Federal Open Market Committee’s (FOMC) dot plots signal only one increase could be on the cards in 2020. This is a significant downward revision from December 2018’s FOMC meeting, where its minutes suggested two rises for 2019, and a third in 2020.

The ECB added to the looser policy theme in March, when it announced its intention to push back rate-hike plans until at least the end of 2019. It also announced fresh funding for banks via a series of targeted longer-term refinancing operations.


The second quarter of 2019 is likely to be a watershed moment for financial markets.

Investor and market panic in the last quarter of 2018 was swiftly followed by a rapid and broad capitulation by central banks. The question now is whether this reflects the elevated risk of a coordinated global slowdown (or even recession) that markets worried about, or the restart of a new reflation wave?

The behaviour of US fixed income markets provides some clues as to which way investors are leaning on this question. They began the year with near neutral returns in US Treasuries but have rapidly chased returns in the first quarter of 2019. By the end of March, aggregate demand for US Treasuries hit a 12-month high.

The brief inversion of the three-month, 10-year yield spread has contributed towards fears of a recession given the signal’s track record in the post-war era. However, while aggregate demand for US Treasuries were as strong as they were a year ago, demand across the curve is very different today.

Demand for Treasuries at the front end of the curve, which rose to a five-year high last quarter, led this year’s surge.

This trend stands in contrast to 2018, when demand was entirely led by appetite for the longer-dated Treasuries. Just as there was a clear desire to lengthen portfolio duration last year, so there is a desire to shorten duration today. Also of note is that demand for the belly of the curve, which typically performs well during recessionary periods, has so far been relatively neutral. Investors are enthusiastically buying Treasuries, although they are not betting on a recession just yet, and at these yield levels, are reluctant to add to their overweight at the long end of the curve.


Long-term investors have underweighted emerging market debt, but some threats are clearly diminishing.

The Fed’s capitulation means the risks of rising US rates and a strengthening dollar are modest. On balance, news about the US-China trade dispute appears to be meandering to a more constructive outcome. And the recovery in EM currencies means that the inflation threat has also turned.

In response, even though recession risk has risen in developed markets, long-term investors continue to return to local currency debt markets. This trend is especially true in Mexico, Indonesia and South Africa.


On the political front, emerging markets have been gearing up for high-profile elections this year, which could potentially add some uncertainties to economies. Indeed, Asia will be at the epicentre of the story in the coming months:

  • Thailand held its first general election since a military coup in 2014, although results aren’t expected until May. If the current prime minister, pro-military leader Prayut Chan-o-cha retains his post, the move could potentially be positive for continuity in economic policies.
  • India’s general election is scheduled to take place over seven stages between April and May. Polls currently point to the re-election of the Narendra Modi government, which would underpin the country’s reform path and focus on accelerating growth measures.
  • Indonesia’s presidential ballot took place on 17 April 2019. Although Indonesian President Joko Widodo and his ruling coalition have declared victory, the nation’s electoral commission is expected to officially announce winners on 22 May 2019.  
  • The Philippines will also hold mid-term elections on 13 May 2019. Approval ratings for President Rodrigo Duterte have been strong in recent months, also suggesting some element of certainty.


Emerging market debt rallied in March, with both hard and local currency issues generating positive returns. Asian hard currency and local currency bonds, in particular, recorded total return of 4.9% and 3.2% respectively in the first quarter of 20191.

Investors are seeking risk opportunities with a notable focus on high-yield and investment-grade-quality credit. With yields at multiples of their developed peers, Asian bonds continue to offer attractive investment opportunities.

Visit* for our latest insights and investment ideas for Asian fixed income.

1 Source: Bloomberg, data as of 31 March 2019. Asian hard currency bond return was based on the return of JP Morgan Asian Credit Index. Asian local currency bond return was based on the return of Markit iBoxx ABF Pan-Asia Index.


All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Past performance is not a guarantee of future results.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The views expressed in this advertisement are the views of Kheng Siang Ng through the period ended 23 April 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web:*

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong • Telephone: +852 2103-0288 • Facsimile: +852 2103-0200 • Web:*

This advertisement has not been reviewed by the Securities and Futures Commission of Hong Kong (the “SFC”).

© 2019 State Street Corporation - All Rights Reserved. 2512058.1.1.APAC.RTL. Exp. Date: 04/30/2020

*This website has not been reviewed by the SFC.


¬ Haymarket Media Limited. All rights reserved.