Demand for Asian bonds is selectively returning, with China's long end and the Philippines' front end most favored

Overview

By tracking issuance progress, maturity structures, investor holdings, and index weights for major Asian local-currency government bonds, the report concludes that regional demand is returning, though unevenly across countries and curve segments. Its core conclusions are that demand for Chinese government bonds is sufficient to absorb additional third-quarter issuance, the Philippine front end is supported by the policy cycle, and demand at the Thai back end is improving; constraints remain at India's back end, in foreign inflows to Indonesia, in Korean insurance demand, and in Malaysia's fiscal supply.

Core views

The report first identifies two regional themes. On the demand side, front-end demand in high-yield markets is beginning to improve: Indian banks are receiving low-cost rupee funding from FCNR(B) inflows and preferential swaps with the Reserve Bank of India and need to allocate the resulting deposits to short-term government bonds; continued slowing in Philippine loan growth is strengthening demand for front-end government bonds. Long-end demand is also recovering selectively, supported by Bank Indonesia's renewed purchases of bills and bonds over the past two weeks, easing concerns about additional Korean bond issuance, support from Malaysia's EPF, and the re-entry of Thai financial institutions. China is a strong exception, with robust demand across the curve amid a weak macroeconomic environment. In contrast to improving demand from local institutions, marginal support from index-driven foreign investors has weakened. India's inclusion in the Bloomberg Global Aggregate Index has again been delayed, while Indonesia, Thailand, and Malaysia have all experienced notable declines in their GBl-EM benchmark weights. On the supply side, slower-than-expected issuance in the first half has not prompted governments to comprehensively accelerate long-term bond issuance in the second half. Instead, debt management authorities are making greater use of alternative financing. Indonesia is increasing bill issuance and external financing, prompting the report to cut its 2026 supply forecast by 10%; the Philippines is increasing external issuance; South Korea has slowed issuance for a third consecutive month due to stronger fiscal revenue; Thailand is relying more heavily on treasury bills and promissory notes and has already cut ThaiGB supply by 3%; and Malaysia is increasing private placements. This structure generally reduces direct supply pressure on long-term local-currency government bonds, although each market must still be assessed in conjunction with maturity distribution and investor demand. Chinese government bonds are the report's clearest positive view. Central government bond issuance rose 10% year over year in July, reaching the highest level ever recorded for that month, while local government bond issuance remained slow because of insufficient projects. The Politburo's call to accelerate bond issuance suggests that the previous slowdown more likely reflected deferred supply rather than a reduction in the annual plan. Assuming central government bonds complete the full-year quota by year-end and local government bonds are completed by November in line with historical patterns, the report estimates that issuance from August through November will increase 11% year over year and be 5% above the three-year average. Nevertheless, the report believes that the weak macroeconomic environment will keep banks, insurers, wealth management products, and securities firms seeking duration assets, generating sufficient demand to absorb the additional supply. After three consecutive months of net liquidity withdrawal, the People's Bank of China resumed net injections in June and July, which also supports coordination between fiscal and monetary policy during bond issuance. Evidence of actual Chinese demand includes the following: life insurers, securities firms, and wealth management products collectively purchased a net RMB384bn of government bonds in June, the strongest monthly buying since July 2025; the equity market weakened in July, with the Shanghai Composite falling 7% during the month, while another tracking measure showed an 8% decline, thereby reducing pressure for rotation from bonds into equities; both 10-year and 30-year government bond yields fell 3bp; and the bid-to-cover ratio at the August 5 auction of 30-year government bonds exceeded 6x, well above the usual 3-4x range. Based on this evidence, the report goes long CGB 2.23 06/25/56 at an entry yield of 2.18%, combined with a 6-month CNH FX hedge at an implied level of 1.26%, with a target yield of 1.90% and a stop-loss yield of 2.29%. The rationale is that, as in 2023-2024, weak macroeconomic sentiment can support the long end even when stimulus expectations exist. With limited room for large-scale easing, duration demand may strengthen further once stimulus expectations fade. Indian government bonds show clear curve differentiation. FCNR(B) inflows and preferential swaps with the Reserve Bank of India are boosting bank demand, and new capital may initially be parked in short-term IGBs. The expansion of the range of FAR-eligible bonds also kept foreign demand robust in June and July. However, India's inclusion in the Bloomberg Global Aggregate Index has again been delayed, potentially weakening subsequent foreign inflows. The back end faces two pressures: slowing life insurance premium growth and the concentration of approximately 60% of the Reserve Bank of India's INR 3.19tn SDL issuance guidance for July through September in maturities of more than 15 years. The report therefore believes the back-end rally remains constrained and continues to favor an Indian curve-steepening position, focusing on the front end supported by the Reserve Bank of India's dovish bias. Demand at Indonesia's long end has shown signs of recovery over the past two weeks. Since July 22, Bank Indonesia has increased its bill and bond holdings by IDR 7.1tn, with consecutive weekly increases of IDR 3.6tn and IDR 3.5tn. Its absorption of year-to-date net supply rose from 22.2% in June to 26.5% at the end of July, again exceeding May's 26.1%. The share absorbed by insurers and pension funds also increased from 35.7% to 40.7%, with the improvement primarily driven by insurers as life insurance premium growth bottomed in May and recovered slightly in June. Pension contribution growth remains negative, and pension-fund bond demand is expected to stay subdued through the end of the third quarter. Mutual funds' absorption of year-to-date net supply, meanwhile, fell from 2.39% in June to 1.97% in July, far below the 10.6% recorded for full-year 2025. The report cuts its forecast for total 2026 IndoGB supply by 10% to IDR 950tn because current issuance progress is approximately 10 percentage points below the historical average and expects the debt management authority to increase external financing. If support from the central bank and insurers persists, the yield curve is likely to remain flat. Foreign demand for Indonesian bonds remains constrained by benchmark weights. Foreign investors made tactical purchases after 5-year and 10-year yields rose by approximately 20bp from early July, but the country's GBl-EM weight has mechanically fallen from 10% to 9%. Since May 2026, Indonesia's weight has declined by 1.0 percentage point, the largest drop among index constituents; Thailand and Malaysia have fallen by 0.6 and 0.5 percentage points, respectively, while China and India remain at the 10% weight cap. The stock of eligible Indonesian government bonds grew 9.3% in the first half, but currency depreciation detracted 7.6% and bond valuation changes detracted 6.8%, resulting in a net decline of approximately 5% in the US dollar market value of eligible securities. The report estimates that for Indonesia's weight to return to 10%, IndoGBs would need to outperform other constituent markets by approximately 11%, or eligible bond supply would need to grow approximately 11% faster. The single-country cap in the diversified GBl-EM index will fall to 9% in January 2027. Indonesia can currently still reach that cap, but its buffer against further declines has narrowed. Supply and demand conditions for Korean government bonds have improved at the margin. The August KTB issuance plan is KRW17.3tn, 8% below August 2025 and 3% below the average from January through July of this year, marking the third consecutive month of slower issuance. Bonds with maturities of more than 20 years account for only 23% of issuance, below the 32% recorded from January through July and the approximately 35% target of South Korea's Ministry of Economy and Finance. Stronger-than-expected fiscal revenue and slower issuance have reduced market concerns that semiconductor investment plans will trigger additional bond issuance. Under the current plan, total financing progress may reach only 70% in August, below the three-year average of 78%, and final annual issuance may fall below the government's target. Banks' KTB holdings are highly correlated with their loan-to-deposit ratios, so deposit growth may strengthen subsequent demand. However, growth in life insurers' holdings has deteriorated markedly because of premium pressure since late 2025, and their increasing allocation to overseas assets means that a premium recovery may not automatically translate into KTB demand. Securities firms previously rotated into equities, and their interest in KTBs may recover only if the KOSPI's strength ends. The report is awaiting the FY2027 budget proposal to be released in August for confirmation of subsequent issuance plans. The report is cautious on Malaysian government bonds. Ahead of the October budget announcement, the market has begun to focus on 2027 supply. The government plans to reduce the fiscal deficit to 3% of GDP by 2030, but the ruling party's recent weak performance in state elections has shifted the fiscal stance toward expansion, raising the risk that the 2027 deficit and bond issuance will exceed expectations. Demand from most investors is not strong, apart from the EPF, whose contributions may rise because of wage growth. Foreign ownership of MGS/MGII has fallen to 20.6%, its lowest level since 2010, but Malaysia's GBl-EM weight was still 9.4% as of the end of June, leaving room for further declines before the single-country cap falls to 9% in 2027. The report therefore expects bear steepening to continue and remains on the sidelines in MGS. Among other markets, supply-demand conditions for Singapore government bonds are expected to improve over the remainder of the year: issuance was already 85% complete by the end of July, while SGS are more attractive than US Treasuries after cross-currency swap hedging, potentially boosting demand from life insurers. In the Philippines, favorable front-end demand, signs that inflation is peaking, and continued growth deceleration strengthen the view that the Bangko Sentral ng Pilipinas is nearing or may already have reached the end of its hiking cycle. The report initiates a long position in 5-year, FX-hedged RPGBs. Total long-term Thai bond issuance is expected to remain broadly stable from FY2026 to FY2027. Although redemption pressure will rise significantly, additional financing may be completed through treasury bills and promissory notes; improving long-end demand from financial institutions supports the report's continued bullish view on the back end of ThaiGBs.

Analysis framework

The report first constructs a bond supply-demand map for each market. On the supply side, it compares annual issuance plans, year-to-date completion rates, net supply, and maturity distributions, while identifying alternative channels such as bills, external financing, and private placements. On the demand side, it breaks down holdings and net absorption across central banks, banks, insurers, pension funds, mutual funds, securities firms, and foreign investors. It then links these flows to loans, deposits, insurance premiums, pension contributions, equity performance, fiscal revenue, and macroeconomic policy to assess changes in demand across different curve segments. Finally, it evaluates the impact of passive foreign investment through changes in GBl-EM index weights, exchange rates, and bond valuations, and uses the findings to formulate specific long positions, curve trades, and watchlists.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Government bond demand-supply mapping

  The report compares bond issuance volumes, issuance progress, and maturity structures by country, and matches them with the purchasing capacity of different investor groups to determine whether yields face pressure or receive support.

• Fixed Income and Credit AnalysisYield curve analysis

  Segmented assessment of the front and back ends

  Rather than treating each market as moving uniformly in one direction, the report separately evaluates funding, policy, and supply conditions at the short and long ends, leading to views such as a long position at China's long end and a steepening trade on the Indian curve.

• Event Trading and Behavioral FinanceFund Flow/Positioning Analysis

  Tracking holdings and net supply absorption by investor category

  Holdings and purchasing flows among central banks, banks, insurers, pension funds, funds, securities firms, and foreign investors are used to identify the true marginal buyers rather than relying solely on total issuance to determine market direction.

• Event Trading and Behavioral FinanceEvent-driven analysis

  Fiscal budgets, issuance guidance, and index rule changes

  The report assesses future changes in supply and passive fund flows based on accelerated Chinese bond issuance, South Korea's FY2027 budget, Malaysia's October budget, and the 2027 adjustment to the GBl-EM weight cap.

• (Out-of-Vocabulary Method)

  GBl-EM benchmark weight decomposition

  The report decomposes changes in country weights into the effects of eligible bond supply, exchange rates, and bond valuations to explain declining Asian weights and weakening support from index-driven foreign investors.

• Fixed Income and Credit AnalysisSpread analysis

  Relative-value comparison after cross-currency swap hedging

  The report compares the attractiveness of SGS and US Treasuries on a consistently FX-hedged basis to assess potential demand from Singaporean life insurers.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese Government Bonds (CGB)

  The report initiates a long position in 30-year CGBs, believing that duration demand generated by macroeconomic weakness can absorb increased third-quarter supply.

  Strengths

  Strong net purchases by non-bank institutions, exceptional demand at long-end auctions, and liquidity support from the People's Bank of China.

  Weaknesses

  Central and local government bond issuance is expected to accelerate significantly over the next three months.

  Comparison

  Compared with most Asian markets, Chinese government bonds exhibit strong demand across the curve.

  Risks

  Supply growth may exceed expectations, or stimulus and equity-market performance may again drive a rotation from bonds into equities.

• Indian Government Bonds (IGB)

  The front end is supported by banks' low-cost funding and dovish policy, but the report maintains its curve-steepening view.

  Strengths

  FCNR(B) inflows, preferential swaps with the Reserve Bank of India, and the expanded range of FAR-eligible bonds support demand.

  Weaknesses

  Slower life insurance premium growth and concentrated SDL issuance with maturities of more than 15 years.

  Comparison

  Front-end demand is notably stronger than back-end demand.

  Risks

  The renewed delay in Bloomberg Global Aggregate inclusion may weaken foreign demand.

• Indonesian Government Bonds (IndoGB)

  Renewed supply absorption by the central bank and insurers should help keep the curve flat.

  Strengths

  Resumed central bank purchases, improving insurance demand, and a 10% cut to the 2026 supply forecast.

  Weaknesses

  Demand from pension funds and mutual funds remains weak.

  Comparison

  Demand from local institutions is improving, but passive foreign support is weaker than before.

  Risks

  The decline in the GBl-EM weight to 9% may constrain further foreign participation.

• Korean Treasury Bonds (KTB)

  Continued issuance slowdown and improved fiscal revenue have reduced concerns about additional supply, while demand is recovering at the margin.

  Strengths

  August issuance is lower both year over year and versus the recent average, while bank deposit growth may strengthen allocation demand.

  Weaknesses

  Growth in life insurers' holdings has deteriorated, and securities firms previously rotated into equities.

  Comparison

  The supply side is more favorable than the market previously feared, but investor demand remains uneven.

  Risks

  Life insurers are increasing overseas asset allocations, so a premium recovery may not generate KTB demand.

• Malaysian Government Bonds (MGS/MGII)

  The report remains on the sidelines and expects supply concerns to drive further bear steepening of the curve.

  Strengths

  EPF contributions may be supported by strong wage growth.

  Weaknesses

  Most sources of demand outside the EPF remain weak.

  Comparison

  Compared with Chinese, Philippine, and Thai bonds, on which the report is bullish, Malaysia's supply-demand outlook is more cautious.

  Risks

  The 2027 fiscal deficit and bond issuance may exceed expectations, while the index weight may decline further.

• Singapore Government Securities (SGS)

  Supply-demand conditions are expected to improve over the remainder of the year.

  Strengths

  Issuance was already 85% complete by the end of July, and SGS are more attractive than US Treasuries after hedging.

  Comparison

  Relative value after cross-currency swap hedging is favorable for attracting life insurance funding.

• Philippine Government Bonds (RPGB)

  The report initiates a long position in 5-year, FX-hedged RPGBs.

  Strengths

  Favorable front-end demand, signs that inflation is peaking, and continued growth deceleration.

  Comparison

  The report believes the Bangko Sentral ng Pilipinas is closer than previously thought to the end of its hiking cycle.

• Thai Government Bonds (ThaiGB)

  Renewed participation by financial institutions in the long-end market supports the report's continued positive view on the back end.

  Strengths

  Total long-term bond issuance is expected to remain stable, while additional financing needs may be met through treasury bills and promissory notes.

  Weaknesses

  A declining index weight weakens marginal support from foreign investors.

  Comparison

  Improving long-end demand from local financial institutions partly offsets weaker index-driven foreign investment.

  Risks

  The GBl-EM weight has fallen 0.6 percentage points since May 2026.

Key data

• China's central government bond issuance in JulyUp 10% year over yearThe highest July issuance level on record
• Net government bond purchases by Chinese non-bank institutionsRMB384bnCombined net purchases by life insurers, securities firms, and wealth management products in June, the highest monthly level since July 2025
• Bid-to-cover ratio for China's 30-year government bond auctionAbove 6xAugust 5 auction, versus a typical level of 3-4x
• Expected growth in Chinese bond issuance from August through NovemberUp 11% year over year, 5% above the three-year averageBased on the assumption that central and local government bonds complete their annual quotas in line with historical patterns
• 30-year CGB tradeEntry 2.18%, target 1.90%, stop-loss 2.29%The instrument is CGB 2.23 06/25/56, with a 6-month CNH FX hedge
• India's quarterly SDL issuance guidanceINR 3.19tnApproximately 60% of July-September issuance is allocated to maturities of more than 15 years
• Increase in Bank Indonesia's bill and bond holdingsIDR 7.1tnWeekly increases of IDR 3.6tn and IDR 3.5tn over the two weeks since July 22
• Bank Indonesia's share of net supply absorption26.5%At the end of July, up from 22.2% in June and above 26.1% in May
• Indonesia's forecast total supply in 2026IDR 950tnThe report cut its forecast by 10%, as current issuance progress is approximately 10 percentage points below the historical average
• Indonesian mutual funds' share of net supply absorption1.97%Down in July from 2.39% in June, versus 10.6% for full-year 2025
• South Korea's August KTB issuance planKRW17.3tn8% lower year over year and 3% below the January-July average for the year
• Share of South Korean bond issuance with maturities above 20 years23%Below 32% from January through July and the government's target of approximately 35%
• Indonesia's GBl-EM weight9%Down 1.0 percentage point since May 2026
• Change in the US dollar market value of eligible Indonesian bondsDown approximately 5%Supply grew 9.3% in the first half, but currency depreciation detracted 7.6% and bond valuation changes detracted 6.8%
• Foreign ownership of Malaysian MGS/MGII20.6%The lowest level since 2010
• Completion rate of Singapore government bond issuance85%As of the end of July 2026

Impact & implications

The report argues that the direction of Asian bonds cannot be determined solely by total supply; the real differences arise from supply maturities, alternative financing methods, and marginal buyers. A weak macroeconomic environment and ample liquidity favor China's long end; bank funding and the policy cycle support the front ends in India and the Philippines; the return of central bank and insurance funding supports Indonesia's long end; and South Korea benefits from slower issuance. Conversely, declining index weights constrain regional foreign demand, while supply at India's long end, uncertainty over Korean insurance demand, and potential fiscal expansion in Malaysia may continue to pressure parts of their curves.

Risks

• Support for Asian bonds from index-driven foreign investors is weakening. India's inclusion in the Bloomberg Global Aggregate Index has again been delayed, while the GBl-EM weights of Indonesia, Thailand, and Malaysia have declined.
• Chinese bond issuance may accelerate significantly over the next three months; if local institutional demand falls short of the report's expectations, the additional supply may create pressure.
• Indian life insurance premium growth is slowing, and approximately 60% of the INR 3.19tn quarterly SDL issuance is concentrated in maturities of more than 15 years, potentially continuing to pressure the back end.
• Demand from Indonesian pension funds and mutual funds is weak, while the decline in the benchmark weight to 9% may limit further foreign buying.
• Korean life insurers are increasing overseas asset allocations, meaning a recovery in premiums may not lead to a revival in KTB demand.
• Malaysia's fiscal consolidation may stall, creating a risk that the 2027 deficit and government bond supply exceed expectations.

What to watch

• Monitor whether Chinese central and local government bond issuance grows 11% year over year over the next three months as expected and whether institutional demand continues to absorb the supply.
• Monitor liquidity injections by the People's Bank of China, equity-market performance, and whether rotation from bonds into equities re-emerges.
• Monitor Indian life insurance premiums, SDL issuance with maturities of more than 15 years, and progress toward inclusion in the Bloomberg Global Aggregate Index.
• Monitor whether Bank Indonesia's bond purchases continue, as well as changes in insurance premiums, pension contributions, and mutual funds' absorption share.
• Monitor South Korea's FY2027 budget proposal to be released in August and whether annual issuance falls below the government's target.
• Monitor guidance from Malaysia's October budget on the 2027 fiscal deficit and bond issuance plan.
• Monitor passive fund adjustments after the single-country weight cap in the diversified GBl-EM index falls from 10% to 9% in January 2027.
• Monitor Singaporean life insurance demand, the end of the Philippine rate-hiking cycle, and whether Thai financial institutions sustain their long-end allocations.