The Rally in Southeast Asian Bonds Can Last Into 2021


Indonesian bonds have led a recovery in Southeast Asian debt this quarter amid prospects for a vaccine-aided economic rebound. The region’s resilient fixed-income performance could be a harbinger for 2021.

The Rally in Southeast Asian Bonds Can Last Into 2021

Rupiah and baht government bonds are leading the pack in the fourth quarter, offering total returns close to 10% and 5% respectively so far. Rates and currencies of both nations have rallied in lockstep following the market-friendly conclusion to the U.S. elections and optimism over the efficacy of several vaccine candidates.

Regional currency performance is likely to be the main contributor to returns next year as policy rates are already at record lows. Collectively, Southeast Asian central banks have cut benchmark rates by 500 basis points this year, with 425 basis points of reductions seen in the first half.

Moreover, relatively severe lockdown and distancing indicators suggests many economies in the region will stand to gain from an eventual distribution of a vaccine.

Global emerging-market local-currency bonds have already rallied by close to 4.5% this quarter alone, with year-to-date figures showing a net positive total return of 2.8%, according to a Bloomberg Barclays index. While Latin America has outperformed Asia this quarter as vaccine developments turbo charged optimism for a recovery in worst-hit countries such as Brazil and Colombia, Southeast Asian bonds have other positives working for them.

Below are the key factors -- currency, inflation and vaccines -- that will likely feature in next year’s bond performance.

Currency Valuation

The rupiah remains undervalued compared to peers, offering the most potential upside. The currency’s real effective exchange rate stands around 3.5% below its five-year average, according to data compiled by Bloomberg. That compares with Malaysia, which is fairly valued by this measure, while the baht and peso’s REER are more than 3% overvalued compared to the five-year mean. Bank Indonesia has said the rupiah remains undervalued, signaling that it’s unlikely to hinder any appreciation moves.

Inflation Outlook

Indonesia could potentially further its real-yield advantage over regional peers with inflation in 2021 only expected to rise marginally from this year. It already has nominal yields that are the highest in the emerging-Asia region.

The country’s 2021 inflation will be at 2.4%, according to a median estimate of economists surveyed by Bloomberg. That compares with an average of 2.1% seen in the first 10 months of 2020. In comparison, price gains for Thailand and Malaysia next year are forecast to be at 1% and 1.8% respectively, a significant jump from current levels, as both nations have seen eight consecutive months of deflation so far.

The Rally in Southeast Asian Bonds Can Last Into 2021

Vaccine Distribution

The current lockdown and the corresponding impact on mobility in Malaysia and the Philippines is more severe than the average in the Asia-Pacific region, according to an effective lockdown index compiled by Goldman Sachs Group Inc. Both nations on average have an index score of 48.7, above the Asia-Pacific mean of 21.7. Indonesia’s stands at 22.0.

As such, a wide spread distribution of the vaccines will likely boost consumption and growth, especially in those countries most hit by the lockdown currently.

Although Thailand’s mobility restrictions are currently less severe than its Asian peers, the nation will gain from the rebound in tourism, which historically contributes around 20% of gross domestic product. The baht previously rallied following positive late stage results from Pfizer Inc. and Moderna Inc.

What to Watch

  • Malaysia will be publishing trade data on Monday, with September exports having previously jumped to the highest in two years
  • Indonesia’s inflation numbers are due Tuesday, having remained below the central bank’s 2% to 4% inflation target for five straight months, while the government will also be targeting to sell 20 trillion rupiah ($1.4 billion) in debt on the same day
  • Thailand will be releasing current-account figures on Monday, and inflation numbers Friday
  • The Philippines is also scheduled to release inflation data on Friday

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.