Asia Rates 2022: Growth Priorities vs Fed Concerns
- Bond supply pressures and possible bond demand gaps are additional challenges
- Theme 1 - Asia rates performance could deteriorate in early part of Fed tightening cycle
- Theme 2 - China's divergences on growth and policy to be reflected in outperformance of CNY rates
- Theme 3 - Cheap valuations and low foreign ownership across Asia bonds could provide some cushion
- Environment could turn more conducive later this year when Fed and Asia tightening gets digested
The macro backdrop is likely to stay difficult in 2022, at least for 1H. The combination of a weaker global outlook due to Omicron and a hawkish and faster-moving US Fed will prove to be a challenging setup for Asia bonds. Historically, Asia bonds do not perform in a Fed hiking cycle, especially if the global outlook is not particularly strong.
From an economic perspective, Asia has been harder hit by the pandemic due to slower vaccinations, less resilient healthcare facilities, and harsher restrictions. Asian economies will continue to recover in 2022 but the growth momentum will be weaker than the US. Asia is unlikely to close the growth gap just yet because of more downside risks from Omicron.
With the economic recovery on a weaker footing and inflation much more benign in Asia, Asia central banks could also be less keen to match the US and global pace of policy normalization and rate hikes.
Therefore, in 2022, we expect developments to be more challenging in 1H before bottoming and turning around in 2H. From an EM rates perspective, the most welcome outcome in 2022 will be a moderation in US inflation. That would allow markets to price for a more measured path of Fed tightening. This would go a long way towards easing some of the external pressures on EM/Asia rates and bonds.
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