Asian bonds look better than emerging markets peers

Asian bonds look better than emerging markets peers

After a surprisingly hawkish remarks by the Federal Reserve chair, the Bloomberg Asia bonds look better placed than their emerging-market peers to withstand further volatility.

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Asian notes in Europe, the Middle East, Africa, and Latin America have a lower sensitivity to the Treasury yield moves due to robust fundamentals, which has led to lower sensitivity to Treasury yield moves. Proximity to China's economy, the world's second biggest, helps reduce the impact of US developments in the region.

That may insulate Asia debt from market swings if February US nonfarm payrolls data shows 10 year Treasury yields jumped 13 basis points after January data showed an unexpectedly sizable increase on February 3.

Asian bonds have shown a daily correlation to Treasuries over a 90 day period of 0.13, with the same gauge for EMEA and LatAm higher at 0.45 and 0.29 respectively. After Fed Chair Jerome Powell hawkish remarks Tuesday about continued elevated volatility in the US debt market, sharp swings in Treasury yields were made in the wake of sharp swings in Treasury yields. A measure of asset volatility compared to the overall market may boost the appeal of Asian bonds due to their relatively low beta.

According to Winson Phoon, head of fixed income research at Maybank Securities Pte, expect regional Asia local currency bonds to trade on a lower beta basis compared to Treasury yields, given the better visibility to the peak rate. He said that the region also benefits from easing core inflation and currency stability.

Policy rates in several major Asian economies are approaching terminal levels. Bank Indonesia has signaled that no more rate hikes are needed, while benchmark rates in India and South Korea appear close to peak levels, according to median of economists surveyed by Bloomberg. Malaysia held policy rates at 2.75% on Thursday, its second straight decision to keep policy unchanged.

The gauge for South Korea decreased in February for the first time in six months, while the core inflation in Thailand and Indonesia fell for two consecutive months.

Market sentiment in Asia is more affected by the outlook for China than the global EM counterparts. That has an impact on unhedged bond returns based on local currency rates, as well as the won, Taiwan dollar and ringgit.

Asian bonds are perceived to have better credit risk compared to their global emerging-market peers, which leads to a smaller selloff due to signs of tightening US financial conditions. The average five-year credit-default swap for Asian bonds is 70 basis points, which is lower than the 147 basis points for EMEA notes and 151 basis points for Latin American peers.

Latin American bonds are more susceptible to US yield moves due to stronger trade links and the tendency of policy makers such as those in Mexico to hike in lockstep with the Fed.

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