Currency strength continues to sustain Asian bond returns
Asian bond markets delivered a constructive month in August 2026, with the iBoxx ABF Pan-Asia Bond Index rising by 1.45% on a US-dollar unhedged basis, well ahead of the US-dollar hedged return of 0.44%. Overall, regional currency strength (versus the US dollar) contributed 1.02% to unhedged performance.
Market Overview
On the monetary front, the Bank of Korea raised its base rate by 25 basis points to 3.0% in August 2026 – its second consecutive hike and the first back-to-back increase in over three years – as inflation remained above target and growth ran ahead of expectations. Bangko Sentral ng Pilipinas also increased its policy rate by 25 basis points to 5.0% in August 2026, its third increase this year, citing volatile oil prices, El Niño-related risks to agricultural prices and potential wage adjustments.
Other regional central banks left policy unchanged: Bank Indonesia held the benchmark interest rate at 5.75%, the Bank of Thailand unanimously maintained its policy rate at 1.0%, Bank Negara Malaysia kept the overnight policy rate at 2.75%, the People’s Bank of China left the one-year loan prime rate at 3.0% and the Hong Kong Monetary Authority retained its base rate at 4.0% under the Linked Exchange Rate System. Ten-year government bond yields moved in both directions over the month, falling in Indonesia (-32 basis points), the Philippines (-12 basis points), China (-3 basis points) and South Korea (-2 basis points), while rising in Malaysia (+16 basis points), Thailand (+8 basis points), Hong Kong (+6 basis points) and Singapore (+1 basis point). Lower yields in several of the region's higher-yielding markets supported hedged returns, while broad currency appreciation against the US dollar was again the decisive driver for unhedged investors.
Market | Local Currency | FX Return | Total Return |
|---|---|---|---|
Korea | 0.2% | 4.2% | 4.4% |
Indonesia | 2.2% | 1.7% | 3.9% |
Malaysia | -0.7% | 1.5% | 0.8% |
Singapore | 0.1% | 0.7% | 0.8% |
China | 0.3% | 0.4% | 0.7% |
Thailand | 0.0% | 0.7% | 0.7% |
Philippines | 1.9% | -1.6% | 0.3% |
Hong Kong | -0.1% | 0.0% | 0.0% |
Growth and Price Pressures Trigger Rate Hike in South Korea
South Korea (USD Unhedged: 4.4%)
South Korea’s 10-year government bond yield declined by two basis points in August 2026, while a 4.2% gain in the Korean won lifted the US-dollar unhedged return to 4.4%. Manufacturing remained expansionary, although the S&P Global Purchasing Managers’ Index (PMI) survey eased to 52.3 from 53.1, as slower domestic order growth was partly offset by the strongest increase in export orders since November 2020, supported by semiconductor and artificial intelligence (AI)-related demand. Gross domestic product (GDP) growth expanded by 3.7% year-on-year (y/y) in the second quarter of 2026, while labour-market conditions remained relatively soft despite the export-led recovery. Inflation increased to around 3.1% in August 2026, remaining above the Bank of Korea’s 2.0% target. Against this backdrop, the central bank raised its base rate by 25 basis points to 3.0% on 27 August 2026 – its second consecutive increase – citing persistent inflation, stronger growth and financial- stability risks.
Inflation Climbs but Remains Within Target
Indonesia (USD Unhedged: 3.9%)
Indonesia’s 10-year government bond yield fell by 32 basis points in August 2026, supporting a 2.2% Indonesian-rupiah return. Meanwhile, rupiah appreciation added 1.7%, lifting the US-dollar unhedged return to 3.9%. Headline inflation accelerated to 3.19% y/y from 2.88% in July 2026, and core inflation rose to 2.92%, although both remained within Bank Indonesia’s 1.5% to 3.5% target range. GDP growth for the second quarter of 2026 expanded by approximately 5.29% y/y, supported by household consumption and government spending. Manufacturing conditions softened modestly, with the S&P Global Manufacturing PMI survey declining to 49.8 from 50.2, indicating a marginal contraction as output and employment fell; however, new orders increased slightly for the first time in three months, and business confidence reached a seven-month high. Bank Indonesia kept the benchmark interest rate unchanged at 5.75% in August 2026, balancing resilient economic growth against continued currency and inflation risks.
GDP Growth Underpinned by Robust Demand and Exports
Malaysia (USD Unhedged: 0.8%)
Malaysia’s 10-year government bond yield rose by 16 basis points in August 2026, contributing to a -0.7% Malaysian ringgit return; however, a 1.5% ringgit gain lifted the US-dollar unhedged return to 0.8%. GDP growth for the second quarter of 2026 accelerated to 6.0% y/y from 5.4% in the first quarter of 2026, supported by resilient domestic demand, technology-related investment and strong electrical and electronics exports, while unemployment remained low at 3.0%. Manufacturing activity was marginally expansionary, although the S&P Global Manufacturing PMI survey eased to 50.2 from 50.7 as growth in new orders and output moderated; employment nevertheless increased for the first time in four months, while price pressures remained subdued. Headline and core inflation averaged 1.8% and 1.87%, respectively, during the first seven months of 2026, while Bank Negara Malaysia maintained the overnight policy rate at 2.75%, balancing contained inflation against resilient growth and external cost pressures.
Tight Exchange-Rate Policy Maintained in Singapore
Singapore (USD Unhedged: 0.8%)
Singapore’s 10-year government bond yield edged one basis point higher in August 2026, while a 0.7% contribution from the Singapore dollar helped lift the US-dollar unhedged return to 0.8%. Private-sector activity remained strong, with the S&P Global Singapore PMI survey rising to 59.4 from 59.2, supported by rapid new-order growth and stronger hiring, although output growth moderated to a 12-month low. GDP growth for the second quarter of 2026 expanded by 5.9% y/y, while overall unemployment remained low at 2.0% in June 2026. The latest available headline inflation reading increased to 2.2% in July 2026. The Monetary Authority of Singapore maintained its tighter exchange-rate policy stance following its earlier increase in the appreciation rate of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, as the authorities continued to monitor imported inflation and elevated input costs.
Foreign Sales Rise but Domestic Demand Remains Soft
China (USD Unhedged: 0.7%)
China's economy showed tentative signs of stabilisation in August 2026, with industrial activity improving from the July 2026 trough, while domestic demand remained subdued, leaving growth reliant on export- and technology-led momentum. The official NBS Manufacturing PMI survey rose to 49.8 from 49.2, which was a second consecutive sub-50 reading but a notably shallower contraction: output, new orders and new export orders returned to expansion, with equipment and high-tech manufacturing again outperforming on the ongoing AI-related investment cycle. The S&P Global Manufacturing PMI survey improved to 51.5 from 50.9, aided by the strongest rise in foreign sales in six months, while services and construction remained softer, with the Non-Manufacturing PMI survey unchanged at 49.0 and the Composite Index at 49.5. July 2026 activity data underscored the weakness in domestic demand: industrial production growth moderated to 4.5% y/y, retail sales rose by just 0.6%, fixed-asset investment declined 6.7% over the January to July 2026 period amid a 19.2% contraction in property investment, and the surveyed urban unemployment rate edged up to 5.2% from 5.0%. With GDP growth for the second quarter of 2026 at 4.3% y/y and growth for the first half of 2026 reaching 4.7%, activity is tracking below the official ‘around 5.0%’ target for the year. Policymakers moved to accelerate support, opening applications on 24 August 2026 for the 800 billion renminbi policy-based financing tool announced in March 2026, though the late rollout limits its impact this year. The People's Bank of China left the one-year loan prime rate and the five-year mortgage reference rate unchanged at record lows of 3.0% and 3.5% for a fifteenth consecutive month, reaffirming its accommodative stance. In fixed income markets, government bond yields were broadly unchanged, with the two-year yield rising approximately one basis point and the 10-year yield declining around three basis points, resulting in a modest flattening of the yield curve as investors balanced soft domestic demand against expectations of continued policy support. The renminbi extended its gains, appreciating approximately 0.5% against the US dollar to close near 6.72, supported by broad dollar weakness in August 2026 and China's sustained external surplus.
Strong Manufacturing Output Aligns with Healthy Business Confidence
Thailand (USD Unhedged: 0.7%)
Thailand’s 10-year government bond yield rose by eight basis points in August 2026, while a 0.7% gain in the Thai baht lifted the US-dollar unhedged return to 0.7% despite a broadly flat local-currency return. Headline inflation accelerated to 2.53% y/y from 1.95% in July 2026, driven by higher fuel and food prices, while core inflation rose to approximately 1.4%. Manufacturing remained firmly expansionary, although the S&P Global Manufacturing PMI survey eased to 53.8 from 54.2: output recorded its second-fastest increase of 2026 and new orders grew strongly, while business confidence reached its highest level since January 2026. Economic growth remained modest and uneven, although exports and private investment benefited from the global technology and AI cycle, while unemployment remained low. On 26 August 2026, the Bank of Thailand maintained its policy rate at 1.0%, judging the accommodative stance appropriate while continuing to monitor energy-related inflation and geopolitical risks.
Philippine Borrowing Costs Increase for a Third Time
Philippines (USD Unhedged: 0.3%)
The Philippine 10-year government bond yield declined by 12 basis points in August 2026, supporting a 1.9% Philippine peso return; however, a -1.6% peso contribution reduced the US-dollar unhedged return to 0.3%. Headline inflation eased marginally to 6.1% y/y from 6.2% in July 2026, while core inflation slowed to 4.1% from 4.2%, although both remained above the central bank’s 2.0% to 4.0% target range. Manufacturing strengthened markedly, with the S&P Global Manufacturing PMI survey rising to 54.9 from 51.8, its highest level since December 2016, as output and new orders accelerated, export demand returned to growth and employment increased for the first time in five months. GDP growth for the second quarter of 2026 remained weak at 2.3% y/y, reflecting subdued investment, while the latest labour-market indicators pointed to some softening. Bangko Sentral ng Pilipinas raised its policy rate by 25 basis points to 5.0% on 27 August 2026, its third consecutive increase, to curb persistent food, energy and transport inflation.
New Orders and Output Tighten in Hong Kong
Hong Kong (USD Unhedged: 0.0%)
Hong Kong’s 10-year government bond yield rose by six basis points in August 2026, while the Hong Kong-dollar contribution was flat, leaving the US-dollar unhedged return at 0.0%. GDP growth for the second quarter of 2026 expanded by 4.3% y/y, easing from 5.9% in the first quarter of 2026 but remained supported by strong external trade and resilient domestic demand. However, the S&P Global Hong Kong SAR PMI survey fell to 49.5 from 51.0, indicating a renewed deterioration in private-sector conditions as output and new orders contracted amid softer demand and higher input costs. Employment also declined for a fifth consecutive month. Hong Kong’s annual inflation rate eased to 1.7% in July 2026, down from 2.0% in each of the previous two months. The Hong Kong Monetary Authority maintained its base rate at 4.0%, consistent with the Linked Exchange Rate System and prevailing US monetary conditions.