Asia Rates: Rising tide of short-term rates

Short-term Asian rates to rise alongside US counterparts.
Duncan Tan03 Nov 2021
    Photo credit: Unsplash Photo

    The recent trend of DM central banks tilting more hawkish, and triggering more aggressive re-pricings of DM rate hikes, are certainly a headwind for Asia interest rates and local currency sovereign bonds. But we think that it is manageable to the extent that we don't expect Asia rates and bonds to significantly underperform. The hawkish tilt across DM central banks has been led by BOE/BOC/RBNZ, rather than Fed/ECB/BOJ who are more consequential from the perspective of EM. As long as G3 central banks don't change their tune on inflation being transitory, the likelihood of an abrupt pullback in global accommodation and liquidity should be seen as low. And by extension, there will still be some level of support for EM assets. From the perspective of Asia rates and bonds, we think oil and energy prices are the bigger concern with wide-ranging and longer-lasting impact on growth and inflation to external balances. See Asia Rates: Impact from rising energy prices. Ultimately, there is a limit to how much financial markets can front-run central banks, and therefore, we expect the sell-off in global short-term rates to see some stabilization shortly. 

    As DM hike expectations get brought forward, short-term Asia rates (2Y, 3Y) would be expected to rise alongside short-term US rates. There could however be some small divergences further out the curves - Long-term Asia rates may not fall with long-term US rates. The nature of DM curve-flattening over the past week is slightly risk-off (higher short-term nominal yields vs lower long-term breakevens) and therefore, Asia risk/term premiums could widen as long-term US rates fall. Following the priced path for US, several Asia swap markets are bunching up multiple rate hikes in the period between mid-2022 and end-2023, followed by a gentler path in 2024 and beyond. This creates opportunities for relative-value and differentiation, to receive short-term Asia rates in markets where hike pricing is aggressive relative to cyclical outlook vs pay rates in markets where there is more scope for hike expectations to build. 

    Duncan Tan

    Rates Strategist - Asia
    [email protected]


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