Several Asian central banks have spent the last few months being more focussed on supporting growth recovery while downplaying the impact of higher energy and food prices. Yet, with a faster pace of reopening in the region and accelerated currency depreciation, the benefits of hanging onto policy accommodation have become much less compelling. The surprise policy tightening in India and Malaysia underscores this clearly. We expect the market narrative over the coming weeks to centre on whether accelerated tightening is necessary in Asia and which central banks are falling behind in efforts to stabilise their countries’ inflation and currencies.

With this view in mind, we are relatively more positive on China, Malaysia and Korea bonds. China’s dovish monetary bias is clear, which allows for continued outperformance versus peers. Malaysia’s pre-emptive tightening, at a time when inflation is lower than that of peers, should result in relative stability in its bond market.

The end of the pension pay-outs and the impending rise in the pension contribution rate should also help boost investor demand for bonds. Korea’s case is trickier, with the new governor open to faster rate hikes. While this presents upside risks to very front-end rates, we do not expect terminal rates priced in the curve to shift higher.

For the two USD-correlated pairs of the SGD and the HKD, currency weakness has led to strong pass-through from the Fed’s recent 50bp hike, particularly so for the SGD. This should persist for a while longer, leading to continued underperformance of front-end rates.