Asia Rates: Index inclusion developments

India’s GBI-EM inclusion likely delayed
Group Research, Duncan Tan28 Sep 2022
    Photo credit: Unsplash Photo

    Overnight, UK Gilt yields rose 30bps, creating more spillovers to USD and EUR rates. Asia rates should open higher this morning.

    INR Rates - Reuters reported yesterday that GBI-EM inclusion would likely be delayed to next year, because key operational hurdles (tax, settlement) remain unresolved. GSec yields rose 7-10bps in response, though the move was subsequently reversed, partly due to the dip in UST yields during Asian hours.

    IDR Rates - SPN/FR issuance yesterday of IDR10.75tn was significantly less than the IDR19tn target. 10Y auction (FR96) issued at weighted-average 7.44% vs 7.12% at the previous auction on 13 Sep. There was also a IDR16.58tn private placement with BI for VR86 and VR87, under burden-sharing agreement (SKB III). We are neutral on IndoGB for now. The expected upcoming jump in inflation prints to as high as 6-8%, due to recent fuel price hikes, would be a litmus test. If BI can succeed in keeping inflation expectations anchored, thereby limiting bond repricing, we think IndoGB would outperform regional bonds.

    KRW Rates - IRS rates pulled back 15-20bps on Tuesday, likely because markets assessed that rates had overshot amidst Monday's volatility. IRS rates at 4.2-4.35% currently represents significant risk premium over our economist forecast of 3.25% terminal policy rates. Part of that risk premium is due to KRW FX's faster pace of depreciation translating to worries of greater inflation passthroughs. Recent reports of BOK being more vocal against KRW FX depreciation and taking steps to counter could help that risk premium in KRW rates to compress. Of note, BOK has signed a currency swap deal with NPS to lend up to USD10bn of foreign reserves, so as to reduce NPS's USD demand in the local spot market for its overseas investments. 

    FTSE Russell will be announcing its September 2022 Fixed Income Country Classification Review Results on Thursday, where South Korea could potentially be added to the watchlist for inclusion into WGBI. In event of addition to watchlist, we expect the impact on KTBs to be relatively modest with yields falling 2-8bps, since KTBs are already well-owned by offshore. We think an addition outcome would be more consequential for Korea's BOP outlook because of the associated large and unhedged bond inflows that would come with eventual inclusion.

    Duncan Tan

    Rates Strategist - Asia

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