Asia needs a greater allocation

Investors should hold more Asian bonds. This can be viewed both from push and pull factors. Diversification from USD assets have been a key push factor over the past few months as confidence in the US gets eroded. Between tariffs, uncertainties over taxes on foreign investments in US assets (section 899) and the unresolved issue of the US fiscal deficit, investors are facing increased urgency to look for alternatives. Moreover, there is a lingering worry that the USD could be persistently weak (lingering worries on the labour market and political infighting) which could eat into investment returns in local currency terms. Within the DM space, Europe is standing out as a beneficiary.

However, this is not just a reallocation within the DM. There will be positive spillover into Asia. Investors have to consider a few factors – store of value, liquidity and returns. Given the diversity across Asia markets, each provide unique pull factors. CGBs, SGSs and HKEFBN could be logical choices if investors require highly-rated safe assets. MGSs could also be a mid-yielding alternative. The trade-off would be the relative low yields offered by these government bonds.

IGBs and IndoGBs offer relatively high absolute yields. The weaker USD, and increased odds of Asia central bank easing should render these government bonds relatively attractive to investors. Some of this is taking place in the shorter tenors but we suspect a reach for yield into the longer tenors will follow.

Since the pandemic, global investors are under owned on Asia govvies. This is because US exceptionalism dominated more the most part of the last few years. But that has changed. Since mid-April, survey-based data showed that EM Asia bond funds received inflows of USD 8bn. Most of the flows went into China, followed by Korea.  Similarly, when we look at official flows into government bonds, there is a pickup in interest. We suspect that this trend has much further to go as investors mull how to place their monies in this new regime. This aligns broadly with our view that Asia government bonds in general do not require such a large premium over their DM counterparts. 

Asia Ex. Japan strategy

CNY rates: CGB yields weighed by overarching growth challenges

The onshore CGB yields are expected to stay steady after the promising trade talks. While recent data print surprises on the upside, investors are not comfortable with the cloudy growth outlook.

First, exports growth could ease after the 90-days truce. Contracting imports reflects softer demand for intermediate goods as manufacturers brace for weaker orders. Second, subdued investment sentiment is evidenced by sharp divergence between robust government bond issuance and soft private credit growth. Household sentiment is also under pressure from weak job prospects, declining income growth, and negative wealth effect from property market. Third, the deterioration in credit demand can be partly attributed to elevated real interest rates. Tariff driven overcapacity and front-loading will weigh on producer prices. For instance, we note a diverging trend between rising automobile production and investment versus tepid domestic sales and exports. Auto PPI thus underperforms the already deflating headline PPI.

Further easing is warranted. After the recent cuts, we expect an additional 20bps cut in the 1Y LPR and a 50bps reduction in the RRR in 2H. These could keep CGB yields in check. More importantly, incremental liquidity could flow into fixed income market in the midst of weak credit demand. The share of bond investment amongst financial institutions’ portfolio stays with its march.

IDR rates: Improving liquidity & rate cuts to support IndoGBs 

Indonesian government bond (Indo GB) yields are expected to fall moderately. Domestically, easing growth momentum (we have downgraded our growth forecast to 4.8% this year, compared to 5% prevoiusly) and contained CPI calls for further monetary easing. While easing was constrained previously, USD weakness should allow for another 50bps cut in the second half of 2025. Liquidity conditions have also become much more flush with recent SRBI auctions showing low rates despite an increase in auction sizes. While fiscal slippage is a concern keeping the curve steep, we suspect that investors would be willing to reach for yield in this environment. IndoGB yield differential against US Treasuries will also likely compress further.

INR rates: Compressing IGB-UST spreads

Demand for Indian bonds has been recovering steadily since the third week after the US’s “Liberation Day.” Equity markets have also seen net foreign inflows. India’s favorable fiscal position, easing inflation, a lower terminal repo rate, and inflows from the “China+1 Strategy” are the key catalysts. 

On the fiscal front, the February budget set a central government deficit estimate of 4.8% and 4.4% of GDP for FY25 and FY26, respectively.  RBI’s dividend transfer further supports IGBs, providing a cushion of +0.12% of GDP to the fiscal deficit.

Against this backdrop, liquidity conditions appear to be easing.  The RBI has injected net INR 5trn YTD, and cut rates benchmark rate by 50bps surprisingly earlier last Friday. The spread between overnight MIBOR and the policy repo rate has fallen below zero.   Finally, still-elevated US tariffs on Chinese imports are inducing FDI inflows.

Strateg-wise, a further grind lower in short end yields may be possible under benign global conditions. However, the largest part of the adjustment may be largely done as further RBI easing requires weak data. Second, we think that there may be interest to extend duration out to 10Y segment. The yield pickup would likely prove enticing to investors in an environment where the USD is weak.

KRW rates: Rate cuts and ongoing fiscal spending

The KTB curve steepened on the back of monetary easing and expectations of increased long-end KTB supply post elections. The supplementary budget plan, along with potential welfare spending under the new government, points to a much more aggressive fiscal stance as policitcal uncertainties / gridlock gets put behind.  That said, the selloff in KTB is orderly as market participants are not overly concerned about the debt load. Instead there is arguably more optimism about Korea, especially when we look at the performance of the won. We think that investor interest will return to the long end after the recent yield adjustment. 

MYR rates: Outperforming MGS as door for first cut opens

An prospective easing cycle by BNM should support long MGS positions.  Asia central banks are already on course with rate cuts since 2024, Bank Negara Malaysia (BNM) has just opened the door for looser monetary policy. Despite holding its overnight policy rate (OPR) at 3.00% on May 8, BNM provided a more downbeat economic growth outlook, alongside slashing the statutory reserve requirement ratio by 100bps, which will inject ~MYR19bn worth of liquidity into the banking system. Rising global risks from escalating trade tensions are negative for Malaysia’s export-oriented sectors and the economy is set to miss its current official 2025 growth projection of 4.5-5.5%.  Steepening will at play as investors bet on the start of the rate cut cycle.

PHP rates: Reaching terminal rate in 3Q25

The Philippine central bank (BSP) is on course with its rate cuts. Another 50bps cut is likely, bringing the benchmark overnight repo rate to its terminal level of 5.00% by the end of Q3 2025.  Including the previous 100bps in cuts, the BSP will have reduced the policy rate by a total of 200bps since mid-2024. While previous reciprocal tariffs on the Philippines were relatively low at 17%, a potential trade war renewal poses risks to the external sector. The US accounted for over 15% of the country’s exports in 2024. Potential spillover effects on the domestic economy and labor market warrant concern.  On the monetary front, rapidly decelerating CPI inflation, which fell from 8.7% in early 2023 to 1.4% in April 2025, allows further rate cuts.  At this juncture, the real interest rate remains restrictive at 4.1%. Short-end Philippine government bond yields will see more notable downward pressure, and the spread against US Treasury yields should compress.

SGD Rates: Widening discount vs USD rates

The discount of SGD rates versus USD rates have been widening since the start of the year. In the front of the curve, SORA fixings have been grinding lower even as the Fed stayed on hold and the MAS flattened the SGD NEER slope. At the start of the year, it was flush SGD liquidity that drove SGD rates lower. This was exacerbated over the past two months as confidence in USD assets get eroded amidst the tariff war and large US fiscal deficits. In the rates space, it means that a premium has got to be built into USD interest rates. Concomitantly, there are more flows into SGD assets as investors rebalance away from the USD. Accordingly, SGD rates is likely to maintain a sizable discount to USD rates with USD weakness a more important driver for relatively value than the slope of the SGD NEER.

HKD rates: Plunging HIBORs

1M HIBOR plunged from 4.00% since early May to below 1% within a month. Overnight HIBOR even fell to below 0.1% since 5th May, the first time since COVID. Meanwhile, the USD rates remain far from the zero-interest-rate regime. This peculiar situation largely results from eroding confidence in the USD and its assets.  Along with the appreciation of other Asian currencies, USD/HKD hit the strong side of its trading band of 7.75 earlier this month, triggering HKMA intervention in the market by selling HKD. The Aggregate Balance, an indicator of interbank market liquidity, jumped almost fourfold to HKD 174 billion from HKD 44 billion.

We expect this anomaly to fade. HKD rates should stabilize or even rebound under the Linked Exchange Rate System. The 3M HIBOR-SOFR spread has widened to an unprecedented level of ~280 bps. This creates an opportunity for carry trades, pulling the USD/HKD spot back from the strong side of the trading band toward 7.83. 12M forward outright also rebounded from 7.68 to 7.71. The immediate need for the HKMA to inject HKD liquidity is therefore reduced. Both USD/HKD and HIBORs are likely to stabilize soon. If HIBORs plummet further toward 0%, the HKD will weaken further toward the weak side of the band, triggering HKMA intervention to buy HKD.  The upshot is that HKD rates should rebound in the near term. In fact, forward IRS rates also exceed current spot rates, suggesting market expectations of rising HKD rates.

That said, we note two upside risks for HKEFBN in the medium-term. First, the structurally weaker USD will tolerate more ample liquidity, lower HIBORs and wider HKD-USD spreads. Second, the limited supply of HKD bonds will sooth the yields. The outstanding Hong Kong government bonds has fallen 37% since its peak amid the Fed hiking cycle and the end of COVID. Even if the government re-engineer its bond issuance to finance fiscal deficit, public debt as a percentage of GDP is only expected to increase from 9% to 16%.

THB rates: Growth downgrade

We see further downside risks to THB rates. The Bank of Thailand (BOT) has potential to cut its policy rate by another 75bps over the next 12 months, following the two 25bps reduction in Q1-Q225. Despite narrowing monetary policy space, this easing trajectory is relatively aggressive compared to other Asian central banks due to underperforming growth. Economic growth will likely slow amid external uncertainty.  Thailand's share of goods exports to the US has increased since Trump's first term, the COVID pandemic, and into his second term. Tourist arrivals have weakened as Thailand loses market share to other regional destinations. Domestically, consumer confidence is softening due to economic uncertainty and job security concerns. We have lowered our 2025 GDP growth forecast to 1.8%, easing from 2.5% in 2024.  Headline inflation that is below the BOT’s 1-3% target also creates room for rate cuts. Strategy-wise, Thai government bond yields will likely fall further, with a steepening yield curve as the core theme.


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