Asia Rates: India bonds not added to GBI-EM

Foreign holdings of IndoGB fell, South Korea CPI slows
Group Research, Duncan Tan05 Oct 2022
    Photo credit: Unsplash Photo

    The relief rally extended for a second day with further pullback in US rates and attendant softening in broad USD. This drove rallies in Asia rates and Asia bond total returns. Fed hike pricing remains the primary driver of Asia rates and bonds outlook, with local idiosyncratic drivers being secondary.

    INR Rates - JPM has announced that GSec under FAR will not be added to GBI-EM for now and will remain under review for inclusion. The key hurdles, based on investor feedback, included lengthy investor registration process, delays in investor repatriation of bond sale proceeds and risks of bond trades failing to be matched on the same day. We think GSecs could slightly sell-off this morning, with yields rising 5-10bps. A larger sell-off is unlikely, as market inclusion expectations have already been dampened after FTSE Russell's review decision not to added GSecs to EMGBI and earlier Reuters reporting, quoting familiar sources, that GBI-EM inclusion won't happen this year.

    IDR Rates - Foreign holdings of IndoGB continue to fall and declines over the last few days have been steep (last at IDR726tn). From an active foreign investor perspective, there has just not been sufficient value creation in yield levels, especially in the longer tenors (>5Y) where foreign holdings are skewed towards. BI's intentions to flatten the curve (Operation Twist) would mean likely limited potential for longer tenors to cheapen and hence, foreign interest may stay lukewarm. For passive/indexed investors, IndoGB's continued outperformance relative to other major EM bond markets likely required investors to regularly trim IndoGB holdings, due to capped weights in major EM bond indices.

    KRW Rates - September CPI printed 5.6% YoY vs survey 5.7%. We think the downside surprise to survey, coupled with this being a second straight month of moderation in YoY prints, could support some market confidence that inflationary pressures are gradually moderating. We could see IRS rates fall 5-15bps today on the CPI print.

    Duncan Tan

    Rates Strategist - Asia

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