Treasury Yield Jump Rips Into Asia’s Sheltered Debt Markets
Treasury Yield Jump Rips Into Asia’s Sheltered Debt Markets
(Bloomberg) -- The suffering for Southeast Asian bonds isn’t over yet, according to a Bloomberg analysis that shows how their central banks’ last stand against tighter policy risks fueling inflation.
Returns on Malaysian, Indonesian, Thai and Philippine debt have all turned negative this year, compared with big gains in countries such as Brazil and South Africa. The woes look set to deepen as U.S. real yields turn positive, taking away a key support for Asian bonds and discouraging inflows into their currencies.
“Asia rates are poised for another selloff as current levels have yet to factor a sufficient amount of inflation risk premium,” especially with price pressures increasing, said Duncan Tan, a Singapore-based strategist at DBS Bank Ltd.
These four charts show how the pressure is increasing on Southeast Asian policy makers amid concerns about low real yields and lack of carry, as well as inflation.
1. Hawkish Bets
Shorter-tenor rates have widened above benchmark policy rates, suggesting that bond investors now increasingly think that rate increases are inevitable. Thai two-year swaps have risen 66 basis points so far this year, the largest move in Southeast Asia as oil prices increase inflation pressures on the import-reliant nation. That’s even with the Bank of Thailand keeping an accommodative stance, the most dovish in the region.
“At this juncture, ASEAN central banks still appear inclined to look past inflation concerns,” said Michelle Chia, regional head of treasury and markets research at CIMB Bank Bhd in Kuala Lumpur. She added that CIMB does expect some central banks to start raising policy rates this year though.
2. Real Yields
Nominal yields adjusted for inflation in Thailand, Indonesia and Malaysia have tightened and are now lower than the three-year mean. The recent jump in real yields on U.S. 10-year Treasuries above 0% also decreases the allure of emerging-market bonds as less risky U.S. assets now offer positive inflation-adjusted returns.
3. Carry Trade
Carry offered by Southeast Asian currencies has steadily declined with policy rates held at record lows while the dollar cost of funding surged in anticipation of Federal Reserve tightening. Aggressive U.S. rate hikes may then encourage outflows, or deter inflows, as investors seek better carry elsewhere.
4. Inflation Targets
Inflation in Southeast Asia has recently surged above, or reached the upper end of central banks’ targets, with the exception of Indonesia. In Thailand, it’s jumped to a 13-year high, and along with the Philippines, the country is one of the most vulnerable in Asia to higher commodity prices, according to Nomura. Malaysia will be releasing March inflation figures on Friday.
READ: MALAYSIA PREVIEW: Inflation Likely Picked Up in March
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