Asia Rates: Sanguine on Asia
Post US Sep CPI release, upward repricing in Fed path is likely to put Asia local macro markets under some selling pressures in the next few days. That said, we expect Asia rates to be resilient and sell off by less compared to US/Core rates. We think there are good reasons to stay sanguine. Asia still has sufficient buffers on FX reserves to intervene, and also has other non-reserve tools that can be called on, such as outright bond purchases and currency swaps. The impact of further compression of Asia-US rate differentials may not be significant, as rate-sensitive portfolio inflows into Asia have already been low over the past two years. Most importantly, this year's selloff in Asia local markets has been orderly and littered with some temporary relief rallies, nothing like the largely one-way move in JPY or the kind of volatility seen in Gilt markets.
KRW Rates - NDIRS rates have retracted the bulk of Wednesday's 15-20bps decline. Market's dovish reaction to BOK's 50bps rate hike on Wednesday was likely because two members dissented (called for 25bps hike) and that could had been seen as prelude to a possible BOK pivot. Though current NDIRS rates of 4.15-4.30% are slightly high relative to our economist forecast for 3.50-3.75% terminal policy rates, it is still too early for receive and/or position for a BOK pivot. First, BOK has tied the duration of its hike cycle to that of the Fed, making KRW NDIRS a high-beta proxy to Fed pricing. And as we have seen last night, Fed pricing continue to face upward pressures. Second, there is some uncertainty around swap fixing rates. The spread between 91D CD fixing rates and 3M MSB yields has widened to more than 50bps vs the usual range of 10-30bps, likely due to higher Bank CD issuances and tighter liquidity. It is unclear when would 91D CD fixing rates normalize lower.
INR Rates - Today's GSec auction is for sale of 2Y, 7Y, 14Y and 40Y bonds. Indicative issuance calendar for 2H of FY shows weekly issuance targets of INR280-300bn, which is around 10% less than the INR320-330bn in 1H calendar. However, we point out that FRB issuances have been removed from the 2H calendar (roughly INR40bn of FRBs were issued on biweekly basis in 1H). Therefore, in duration terms, bond supply pressures are not expected to materially ease in 2H. Coupled with tighter banking liquidity expected for 2H vs 1H, signs of supply pressures may re-surface in 2H.
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