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
    duncantan@dbs.com

     
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.