Asia Rates: June feels different from May
Our economists see many policy rates in Asia below the US by end-2022
Group Research - Econs, Duncan Tan28 Jun 2022
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US rates have pulled back post the June FOMC. We have seen a similar-sized pullback in May where 5Y USD IRS also retracted around 40bps lower and USD OIS/Fed fund futures also priced out close to 2 Fed hikes (50bps). However, from the perspective of Asia rates and bonds, June's pullback in US rates feels quite different from the May experience. In both episodes, Asia swap rates and bond yields declined alongside US rates. The difference has been that Asia bonds' total returns were better supported in May, but in June, total returns are down even with the gains on duration/price. Of late, we think that financial markets have repriced to low levels with regards to the likelihood that Asia central banks could surprise hawkish to the same extent as DM central banks. As a result, June's pullback in US rates have not lifted bond total returns like in May. Based our economists’ forecasts, except for India and Indonesia, we face the prospect that all other Asia policy rates would be lower than the US come year-end. Another contributing factor for June's decline in Asia bond total returns, despite the fall in US rates, could also be the increased market expectations for a US recession, especially after Fed Chair Powell recently described a soft landing as "very challenging". From the perspective of Asia bonds, a US recession would be a massive headwind - US rates would fall but investors would likely have to confront a stronger US dollar and widening of risk and term premiums in Asia bonds.

As has usually been the case in recent months, the direction of China rates have gone against the regional trend over the past two weeks. 5Y CNY NDIRS have risen around 20bps as there is some signs of improvement in the economic recovery, any prospects of rates cuts (to 7D reverse repo, 1Y MLF) are being priced out and accommodative funding rates seem to have hit a bottom.

Duncan Tan

Rates Strategist - Asia
[email protected]

 

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