Asia Rates: External flattening pressures

Korea and the Philippines to be more resistant to bear flattening
Duncan Tan18 Nov 2021
    Photo credit: Unsplash Photo

    In USD Rates: The odds of quicker taper, we suggest that stronger-than-expected US economic data and US inflation risks would support the case for the Fed to move faster, possibly ending taper by end of 1Q. Market expectations for such a scenario could rise in the coming weeks, if the Fed shifts to more hawkish communications around US inflation and employment. In terms of implications for Asia rates, we would expect bear-flattening dynamics across the region, led by front-end of curves, as markets bring forward Asia rate hike expectations to match an accelerated Fed taper.

    There are two bond markets though that we think could be more resistant to externally-driven flattening pressures. For Philippines, with the Bangko Sentral ng Pilipinas, the central bank, focused on supporting growth and liquidity, commodity prices staying elevated and ongoing reopening driving higher domestic demand, we think inflation risk premium in Philippine bonds could widen further. For Korea, the distinct flatness of yield curve is a function of market expectations that Korea's hike cycle would be more front-loaded and shallow. Swap markets are pricing for Bank of Korea to hike four more times and essentially conclude its hike cycle before the end of 2022. At current yield levels, we think the Korean yield curve is biased to re-steepen. There is scope for aggressive hike expectations priced within short-term yields to partially unwind, while long-term Korean yields are likely to rise alongside global yields.

    Duncan Tan

    Rates Strategist - Asia
    [email protected]

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