Yields rise as currency weakness dents Asian bond returns
The iBoxx ABF Pan-Asia Bond Index declined in September 2026, with the unhedged US-dollar version returning -0.75%, compared with -0.43% for the hedged US-dollar version. Currency movements detracted approximately 0.31% from unhedged returns during the month.
State Street Investment Management Fixed Income Portfolio Strategists
Market overview
Asian bonds faced broad-based pressure as government bond yields increased across most markets, including Hong Kong (+52 basis points), the Philippines (+40 basis points), Thailand (+18 basis points), Malaysia (+16 basis points), Indonesia (+14 basis points), Singapore (+11 basis points), and South Korea (+9 basis points). China (-1 basis point) was the only market to record a modest decline in yields. Overall, rising regional yields weighed on underlying bond returns, while adverse currency movements resulted in the unhedged index underperforming its hedged counterpart.
During the third quarter of 2026, the iBoxx ABF Pan-Asia Bond Index generated mixed results. The US-dollar unhedged index returned 1.62%, supported by favourable currency movements that contributed approximately 2.06%. In contrast, the US-dollar hedged version declined 0.44%, reflecting weakness in underlying local bond markets.
Government bond yields increased in Hong Kong (+79 basis points), the Philippines (+69 basis points), Singapore (+43 basis points), Malaysia (+41 basis points), South Korea (+30 basis points), and Thailand (+27 basis points), creating broad headwinds for fixed income performance. Indonesian yields were unchanged over the quarter, while Chinese yields (-5 basis points) declined modestly, providing some support.
On the monetary policy front, the regional stance was generally steady to tighter during the quarter. The Bank of Korea raised its base rate by a cumulative 50 basis points to 3.00%, while Bangko Sentral ng Pilipinas increased its policy rate by 25 basis points to 5.00%. The Hong Kong Monetary Authority also hiked its base rate by 25 basis points to 4.25%, in line with the adjustment in the US federal funds target range. Meanwhile, Bank Negara Malaysia maintained its overnight policy rate at 2.75%, Bank Indonesia held the BI-Rate at 5.75%, and the Bank of Thailand kept its policy rate unchanged at 1.00%. Singapore continued to conduct monetary policy through its exchange-rate-based framework. Overall, the policy backdrop across the region was characterized by selective tightening rather than rate cuts, amid continued inflation and financial stability considerations.
| Market | Local Currency | FX Return | Total Return USD |
|---|---|---|---|
| South Korea | -0.20% | 1.10% | 0.90% |
| China | 0.30% | 0.20% | 0.60% |
| Indonesia | -0.10% | -0.70% | -0.80% |
| Singapore | -0.90% | -0.30% | -1.30% |
| Hong Kong | -1.40% | -0.10% | -1.60% |
| Philippines | -1.40% | -0.60% | -2.00% |
| Thailand | -1.20% | -1.20% | -2.40% |
| Malaysia | -1.10% | -1.30% | -2.40% |
*Please note that the returns shown above relate to the month of September 2026.
Rate hike elevates South Korean bond yields
South Korea (USD Unhedged: 0.9%)
South Korea's 10-year government bond yield rose by nine basis points in September 2026 and 30 basis points in the third quarter of 2026. Korean-won-denominated bonds returned -0.2%, but a positive foreign-exchange contribution of 1.1% lifted the US-dollar unhedged return to 0.9%. Manufacturing momentum strengthened towards quarter-end, with the Purchasing Managers' Index (PMI) survey rising to 53.9 in September 2026 from 52.3 in August 2026. Second-quarter gross domestic product (GDP) growth expanded by 0.6% quarter on quarter (q/q), and consumer price inflation rose to 2.9% year on year (y/y) in September 2026. The labor market remained resilient, with the seasonally adjusted unemployment rate falling to 2.7% in August 2026 from 2.8% in July 2026. With price pressures persistent and activity firming, the Bank of Korea raised its base rate by 25 basis points to 3.00% in August 2026, which pushed government bond yields higher.
Resilient external trade helps balance lackluster domestic demand
China (USD Unhedged: 0.6%)
China’s economic momentum gained some traction toward the end of the third quarter of 2026, although the recovery remained gradual and uneven. Chinese government bonds posted modest gains during the quarter, with the 10-year yield down by five basis points and the two-year yield easing by one basis point. This resulted in a modest bull-flattening of the yield curve (where long-term interest rates fall at a faster pace than short-term interest rates), underpinned by continued policy accommodation and lingering uncertainty over the durability of domestic demand. The renminbi also appreciated by approximately 1.2% against the US dollar in the third quarter of 2026 to around 6.7. Economic growth moderated in the second quarter of 2026, with real GDP expanding by 4.3% y/y, compared with 5.0% in the first quarter. More timely indicators presented a mixed picture: the composite PMI survey recovered to 50.7 in September 2026, while the non-manufacturing business activity index rose to 50.2, signalling a modest improvement in economy-wide activity. Services activity expanded by 4.1% y/y in August 2026; however, retail sales growth remained subdued at 0.4%, while fixed-asset investment contracted by 7.2% over the first eight months of 2026, underscoring persistent weakness in domestic demand and property-related investment. Labour-market conditions remained broadly stable, with the surveyed urban unemployment rate averaging 5.2% during the first eight months of 2026, although the monthly rate edged up to 5.3% in August 2026 from 5.2% in July 2026, largely reflecting seasonal factors. External trade remained a comparatively resilient pillar of growth, with exports and imports rising by 18.6% and 21.7% y/y, respectively, in renminbi terms in August 2026. Over the first eight months of 2026, total goods trade expanded by 17.6%. Inflationary pressures firmed but remained contained at the consumer level, with the headline consumer price index accelerating to 0.8% y/y in August 2026 from 0.5% in July 2026 and core inflation edging up to 1.0%. Producer prices rose by 3.8%, reflecting higher global commodity costs, favourable base effects and high-tech demand. Against this backdrop, the People's Bank of China preserved an accommodative policy stance, leaving the one-year and five-year loan prime rates unchanged at 3.0% and 3.5%, respectively, in September 2026, a 16th consecutive hold.
Improvement in Indonesia’s growth and output
Indonesia (USD Unhedged: -0.8%)
Indonesia's 10-year government bond yield rose by 14 basis points in September 2026 but was unchanged over the third quarter of 2026, as a late-quarter increase reversed earlier declines. Indonesian-rupiah-denominated bonds returned -0.1%, and a negative foreign-exchange contribution of 0.7% reduced the US-dollar unhedged return to -0.8%. Manufacturing returned to expansion, with the PMI survey rising to 52.4 in September 2026 from 49.8 in August 2026. GDP growth in the second quarter of 2026 rose by 5.3% y/y and 3.7% q/q, supported by stronger government consumption. Consumer inflation climbed to 3.3% y/y in September 2026 but remained within the official target range. Bank Indonesia held its policy rate at 5.75% in September 2026, weighing the growth outlook against inflation and currency stability.
Consumer prices edge higher in Singapore
Singapore (USD Unhedged: -1.3%)
Singapore's 10-year government bond yield rose by 11 basis points in September 2026 and 43 basis points over the third quarter of 2026. Singapore-dollar-denominated bonds returned -0.9%, and a negative foreign-exchange contribution of 0.3% reduced the US-dollar unhedged return to -1.3%. Manufacturing conditions remained supportive, with the PMI survey edging up to 51.7 in September 2026 from 51.5 in August 2026. GDP grew by 5.9% y/y in the second quarter of 2026. Headline consumer price inflation rose to 2.3% y/y in August 2026 from 2.2% in July 2026, while core inflation increased to 2.2% from 2.0%, driven by higher services, food and retail prices. The labor market remained firm, with the overall unemployment rate steady at 1.9% in June 2026. However, resident employment growth slowed, and retrenchments rose in the second quarter of 2026. The Monetary Authority of Singapore continued to conduct monetary policy through its Singapore dollar nominal effective exchange rate framework.
Sharp rise in Hong Kong bond yield mirrors US movements
Hong Kong (USD Unhedged: -1.6%)
Hong Kong's 10-year government bond yield rose by 52 basis points in September 2026 and 79 basis points over the third quarter of 2026, the largest quarterly increase among the markets covered. Hong Kong-dollar-denominated bonds returned -1.4%, and a negative foreign-exchange contribution of 0.1% brought the US-dollar unhedged return to -1.6%. Private-sector activity remained subdued, with the PMI survey falling to 49.2 in September 2026 from 49.5 in August 2026. Second-quarter GDP growth expanded by 4.3% y/y, supported by strong external trade and resilient domestic demand. On a seasonally adjusted basis, however, output contracted by 0.6% q/q. Headline inflation stood at 1.7% in August 2026. The seasonally adjusted unemployment rate rose to 3.8% for the June 2026 to August 2026 period (from 3.7% for the May 2026 to July 2026 period). The Hong Kong Monetary Authority raised its base rate by 25 basis points to 4.25% in September 2026, in line with the Linked Exchange Rate System, which aims to maintain Hong Kong dollar stability against the US dollar.
Sticky inflation persists in the Philippines
Philippines (USD Unhedged: -2.0%)
The Philippines' 10-year government bond yield rose by 40 basis points in September 2026 and 69 basis points over the third quarter of 2026. Philippine-peso-denominated bonds returned -1.4%, and a negative foreign-exchange contribution of 0.6% further reduced the US-dollar unhedged return to -2.0%. Manufacturing conditions deteriorated sharply, with the PMI survey falling to 49.6 in September 2026 from 54.9 in August 2026. GDP growth for the second quarter of 2026 expanded by 2.3% y/y. Growth in services and agriculture was partly offset by a contraction in industry and a 9.2% decline in gross capital formation. Headline inflation accelerated to 7.2% in September 2026 from 6.1% in August 2026, driven mainly by higher food, housing and utilities, and transport costs. The unemployment rate stood at 5.3% in August 2026. In response to mounting inflationary pressures, Bangko Sentral ng Pilipinas raised its policy rate by 25 basis points to 5.00% in August 2026.
Thailand’s manufacturing activity gathers pace
Thailand (USD Unhedged: -2.4%)
Thailand's 10-year government bond yield rose by 18 basis points in September 2026 and 27 basis points over the third quarter of 2026. Thai-baht-denominated bonds returned -1.2%, and a negative foreign-exchange contribution of 1.2% lowered the US-dollar unhedged return to -2.4%. Manufacturing remained a relative bright spot, with the PMI survey rising to 54.3 in September 2026 from 53.8 in August 2026. Broader economic momentum slowed in the second quarter of 2026: GDP growth expanded by 1.9% y/y but contracted by 0.2% q/q. Private investment accelerated, while growth in private consumption, government expenditure and goods exports slowed. Headline inflation rose to 2.8% y/y in September 2026, reflecting higher domestic fuel and food prices. The unemployment rate remained low at 1.2% in August 2026, up from 1.1% in July 2026. The Bank of Thailand maintained its policy rate at 1.00% in August 2026.
Economic activity maintains momentum
Malaysia (USD Unhedged: -2.4%)
Malaysia's 10-year government bond yield rose by 16 basis points in September 2026 and 41 basis points over the third quarter of 2026. Malaysian-ringgit-denominated bonds returned -1.1%, and currency weakness added a negative foreign-exchange contribution of 1.3%, reducing the US-dollar unhedged return to -2.4%. Manufacturing conditions softened, with the PMI survey edging down to 49.9 in September 2026 from 50.2 in August 2026, indicating a marginal contraction. The broader economy nevertheless kept solid momentum. GDP growth in the second quarter of 2026 expanded by 6.0% y/y and 2.5% q/q, supported by domestic consumption and stronger exports. Headline inflation stood at 1.9% in the second quarter of 2026, and the unemployment rate remained low at 3.0%. With robust growth and contained inflation, Bank Negara Malaysia kept the overnight policy rate at 2.75% in September 2026.