Asian bond investors brace for increase in US interest rates

Δημοσιεύθηκε: 10 Μαΐου 2015 - 05:48

Asian bond investors are bracing for an increase in US interest rates, with the Federal Reserve expected to announce its first rate hike since the financial crisis within months.

Investors fear a US rate rise could lead to a repeat of the so-called "taper tantrum" of 2013 when Asian bond markets sold off after the Fed first raised the possibility that it would start to scale back its bond-buying programme.

Michael Spencer, chief economist for Asia at Deutsche Bank, believes that, aside from China and India, the US bond yield is the main driver of fixed income markets across Asia.

"Asia's [fixed income markets'] vulnerability to a renewed tantrum is as great as it was in 2013," he warns, adding that foreign investors' holdings of local-currency bonds remain too large in some markets and have not declined materially since 2013.

"This presents a key potential source of contagion from any turmoil in the US bond market to Asia," he says.

Geoff Kendrick, a strategist at Morgan Stanley, the bank, agrees. He is concerned that high levels of foreign ownership of local Asian bonds is a risk, particularly in Malaysia (45 per cent) and Indonesia (38 per cent).

"Low inflation in much of Asia and outright deflation (falling consumer prices) in Thailand and Singapore raise the possibility of more aggressive policies by local central banks," he says. Morgan Stanley forecasts that most Asian countries other than India and China will deliver negative returns over 2015 on 10-year government bonds.

However, Rajeev De Mello, who oversees about $10bn as head of Asian fixed income at Schroders, the investment manager, believes the problem is being overstated.

He maintains that international investors reduced their Asian bond exposures after the 2013 taper tantrum and are now "much more prepared". Policy makers in Asia have already taken steps to reinforce their economies, says Mr De Mello, with reductions in subsidies and increases in taxation.

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>"Asian economies are also large consumers of imported oil so the fall in crude oil prices this year has reduced inflationary pressures and boosted growth prospects," he says.

Economic growth across Asia (ex-Japan) is forecast to average more than 6 per cent this year and next. This is significantly higher than the US, Europe or Latin America.

But Mr De Mello does recognise a "nervousness" around the actions of the Fed. Clients are asking regularly if capital will flow out of Asia once US rates start to increase. He points out that US policy makers are expected to tread cautiously as they begin to normalise interest rates, while Asian markets still offer attractive yields relative to other parts of the world.

Investment-grade corporate bonds in Asia provide a generous yield over comparable issues in both the US and Europe, with spreads of 50 basis points and 90bp respectively.

Joel Kim, head of Asia-Pacific fixed income at BlackRock, the world's largest fund manager, acknowledges the risk of increased volatility when the Fed starts to raise rates, but he is not overly concerned. "If the process is gradual, the impact on Asian bond markets should be manageable," he says.

He argues that with sovereign bonds in many developed markets yielding close to or below zero, a gradual rise in US rates should not spark massive Asian outflows. Asian bond markets have a deep local investor base and are less dependent on foreign investors relative to other emerging markets, says Mr Kim.

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