Asia Rates: Expect external pressures to ease near-term

BOK hike discounted, relatively stable IndoGBs
Group Research, Duncan Tan12 Oct 2022
    Photo credit: Unsplash Photo

    Externally-driven pressures on Asia rates should ease in the near-term. UST yields have fully retracted (higher) from the late-Sep/early-Oct decline, with 2Y back to around 4.3% and 10Y around 4.0%. Unless markets move to price for above-5% Fed rates, the near-term upside for US rates, and by extension, spillover onto Asia rates, could be relatively capped. 

    KRW Rates - Our economist and survey consensus expect a 50bps BOK rate hike today. Of late, BOK Governor has already spoken quite frequently on his thoughts around inflation trajectory and outlook, reaction function to the Fed and expected duration of this hike cycle. Therefore, decision statement and press conference today may not offer fresh insights that could materially shift hike path expectations. 

    IDR Rates - Against IDR10tn target, SPN/FR auction yesterday received incoming bids of IDR15tn and awarded IDR8.22tn. Though issuance was below target, there will be no additional auction (green shoe option) today. We think that recent below-target issuances and subsequent exercises of green shoe option have certainly contributed to the relative stability of IndoGBs, by managing yield cut-offs and in the process, anchoring markets' yield expectations.

    In terms of absorbing this year's IndoGB issuances and offsetting foreign sales in secondary market, local investors particularly retail and insurance/pension funds have been very crucial. For retail, the historically large spread between bond yields and deposit rates has likely been a key incentive. For insurance/pension funds which tend to invest for longer time horizons, some of the longer-tenor IndoGB yields have risen a lot this year, likely presenting attractive yield levels to lock in. Market worries seem instead to centre around banks, who have been a negligible net buyer this year. Worries are that BI's Operation Twist would drive larger losses in shorter-tenor IndoGBs and cause banks, whose holdings are skewed towards the shorter-tenors, to sell bonds. We are however not overly concerned at this point. Looking at indicators such as banking sector's deposits against loans and excess liquidity absorbed at BI's OMOs, banking liquidity has certainly declined materially this year, but is still at flusher levels compared to pre-COVID. We think risks around possible bond supply-demand gaps are further out, likely in 2023.

    Duncan Tan

    Rates Strategist - Asia

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