Asia’s Central Banks Have Built a Buffer Against Surging Yields
The Reserve Bank of India logo is displayed on a gate outside the central bank’s regional headquarters in New Delhi. (Photographer: T. Narayan/Bloomberg)

Asia’s Central Banks Have Built a Buffer Against Surging Yields


Central banks in Asia’s emerging economies added $467.7 billion to their foreign-exchange reserves last year, the most since 2013 when the region’s markets were rattled by the taper tantrum.

The increase reflects intervention in foreign-exchange markets and positive valuation effects that pushed total holdings to $5.74 trillion, just shy of the record $5.8 trillion hit in 2014. The tally excludes developed economies such as Japan and Australia.

That provides Asia with an important buffer against a recent jump in global bond yields. Rising yields have historically triggered currency volatility and driven up borrowing costs in the region.

Asia’s Central Banks Have Built a Buffer Against Surging Yields

A signal in 2013 by then-Federal Reserve Chairman Ben Bernanke that he planned to taper a massive bond-buying program ricocheted through Asia as investors fled and yields surged. The improving global economic outlook this year as Covid-19 vaccines are rolled out has sparked a surge in bond yields and fears that the Fed may withdraw support sooner than expected.

“Taper tantrums may haunt emerging market central banks yet again if the Fed exits prematurely from their bond-buying program,” said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte in Singapore. “That will be another blow to poorer emerging markets, already lagging the recovery because of the uneven vaccine rollout and impact from lockdowns.”

U.S. Scrutiny

Robust trade surpluses and investor inflows will continue to support reserves, but the U.S. Treasury’s increased scrutiny on foreign-exchange intervention will act as a brake on the pace of increase this year, according to Khoon Goh, Singapore-based head of Asia research at at Australia & New Zealand Banking Group Ltd.

While China’s reserves are the world’s biggest, the bulk of last year’s increase came in the rest of Asia. The Reserve Bank of India has been intervening heavily to boost its reserves, and its $583.7 billion stockpile could overtake Russia’s to become the world’s fourth largest. That’s mainly on the back of a rare current-account surplus and robust flows into stock markets.

Indonesia’s reserves rose to a record $138 billion in January, providing a sizable war chest to defend the rupiah. The Philippines accumulated an all-time high of $110 billion in reserves in December, helped by remittances from migrant workers. Thailand’s reserves remain near the all-time high of $259.2 billion reached in January.

Asia looks set to enjoy a cyclical rebound with low real rates to shield against volatility, according to based Alex Wolf, Hong Kong-based head of investment strategy Asia at JP Morgan Private Bank in Hong Kong.

“Bear in mind that insofar as rising yields are a reflection of growth optimism, a lot of that growth should come from Asia in 2021,” he said.

©2021 Bloomberg L.P.

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