Asia Rates: Not yet time to receive

Holding to our long bond ideas to end-year
Duncan Tan10 Nov 2021
    Photo credit: Unsplash Photo

    In line with DM interest rates markets, Asia short-term (2Y, 3Y) rates have retraced lower and volatility seems to be abating. Bank of England not following through on its prior hike hints and ECB President pushing back on the prospects of hikes in 2022 likely triggered a reassessment of whether DM central banks are sufficiently concerned about inflation risks and would move more aggressively on policy normalization. Across Asian swap markets, priced hike paths have come down but remain high relative to most professional forecast. We don’t think this is the time yet to go outright receive on Asia swaps. As long as there is limited market confidence and signs that global inflation would be transitory, the market bias would still be to price for earlier and faster rate hikes. For rate hike pricings to peak and correct lower towards forecast, it would require clear signs of easing of supply bottlenecks and commodity prices, both of which may not be forthcoming in the near-term.

    Our long bond ideas (10Y IndoGB, 30Y CGB) have outperformed - IndoGB and CGB are the only two bond markets, within Asia, to deliver positive total returns (YTD). We are comfortable holding both ideas through year-end and see scope for more returns to accumulate. Indonesia has cancelled the remaining scheduled IDR auctions for the year. Whether it’s the lack of bond supply, Bank Indonesia's flexibility to stay accommodative or strength in external balances (commodity exports, foreign equity inflows), we expect foreign bond investors to soon come around to the many supportive factors and we should see foreign bond inflows return to help drive 10Y IndoGB yields convincingly below 6%. For China CGB, what's negative for China macro/growth can in fact be positive for CGB returns outlook. China's Zero-COVID strategy mean that the timeline for reopening of borders would be pushed back. And by extension, we expect a delay in the normalization of outbound tourism and the services deficit, which will prove to be crucial in ensuring that the current account surplus stays above pre-pandemic levels. Stress in China HY Property and various other growth headwinds will likely ensure that the PBOC stay supportive on liquidity and keep funding rates stable, and also keep alive markets' expectations of additional PBOC easing. There is still more upside to CGB total returns and we continue to stay long.

    Duncan Tan

    Rates Strategist - Asia
    [email protected]

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