Asia bonds look better placed than their emerging-market peers to withstand further volatility after surprisingly hawkish remarks by the Federal Reserve’s chair deepened a selloff in Treasuries.
(Bloomberg) — Asia bonds look better placed than their emerging-market peers to withstand further volatility after surprisingly hawkish remarks by the Federal Reserve’s chair deepened a selloff in Treasuries.
Relative to EM regions in Europe, the Middle East, Africa and Latin America, Asian notes have displayed lower sensitivity to Treasury yield moves due to generally more robust fundamentals. Proximity to China’s economy, the world’s second biggest, also helps reduce the impact in the region from US developments.
That may insulate Asia debt from market swings if February US nonfarm payrolls data on Friday surprises: 10-year Treasury yields jumped 13 basis points after January figures showed an unexpectedly sizable increase on Feb. 3.
Asian bonds on average have shown a daily correlation to Treasuries over a 90-day period of 0.13, with the same gauge for EMEA and LatAm higher at 0.45 and 0.29 respectively. Sharp swings in Treasury yields after Fed Chair Jerome Powell’s hawkish remarks Tuesday highlighted continued elevated volatility in the US debt market. That may boost the appeal of Asian bonds due to their relatively low beta, a measure of an asset’s volatility compared with the overall market.
“Expect regional Asia local-currency bonds to continue to trade on a lower beta basis relative to Treasury yields given the better visibility to the peak rate,” said Winson Phoon, head of fixed income research at Maybank Securities Pte in Singapore. The region also benefits from easing core inflation and currency stability, he said.
Policy rates in several major Asian economies are either at or approaching terminal levels. Bank Indonesia has signaled that no more rate hikes are needed, while benchmark rates in India and South Korea appear close to peak levels, according to median of economists surveyed by Bloomberg. Malaysia held policy rates at 2.75% on Thursday, in its second straight decision to keep policy unchanged.
Core inflation in Thailand and Indonesia has fallen for two consecutive months, while the gauge for South Korea decelerated in February for the first time in six months.
Asian Resilience
Compared with global EM counterparts, market sentiment in Asia is relatively more affected by the outlook for China. That has a bearing on currencies such as the won, Taiwan dollar and ringgit, in turn affecting unhedged bond returns based on local-currency rates.
In addition, Asian bonds are perceived to have better credit risk relative to their global emerging-market peers, which leads to a smaller selloff following signs of tightening US financial conditions. The average five-year credit-default swap for Asian bonds stands at 70 basis points, below the 147 basis points for EMEA notes and 151 basis points for Latin American peers.
Latin American bonds are also more susceptible to US yield moves due to the stronger trade links and the tendency by policy makers such as those in Mexico to hike in lockstep with the Fed.
Correlation
Note: 90-day correlation between a Bloomberg index of emerging Asia yields and 10-year US Treasuries up until Mar. 3
(Updates with Bank Negara Malaysia decision in sixth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.