Asia bond market: Dovish tilt spreads as funds hoover up regional bonds

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Published: March 10, 2019 8:16:45 AM

Debt is rallying across the region as a worsening economic outlook prompts dovish noises from central banks, suggesting the tightening cycle is over.

Bonds are also being boosted by slowing inflation, particularly in Malaysia, where the economy swung into deflation in January. (Representational photo)

The chill winds of slowing global growth that convinced the Federal Reserve to stop raising interest rates are making themselves felt in Southeast Asia — nowhere more so than in the bond market.

Debt is rallying across the region as a worsening economic outlook prompts dovish noises from central banks, suggesting the tightening cycle is over. Indonesia and the Philippines will both hold debt sales this week that are expected to draw bumper demand if recent offerings are anything to go by. Bonds are also being boosted by slowing inflation, particularly in Malaysia, where the economy swung into deflation in January.

“The surprise turnaround in monetary policy stance is certainly refocusing interest back into rates markets,” said Susan Buckley, managing director of global liquid strategies in Brisbane at QIC Ltd., which oversees the equivalent of $60 billion. “There’s a lot more client interest in bonds, and how they can better construct portfolios that capture the shift in policy.”

Here is a quick look at how bonds are benefiting from increased dovishness in three key Southeast Asian economies:

The prospect of any further Bank Indonesia tightening is diminishing after the central bank dropped some of its hawkish comments at its Feb. 21 rate meeting. The strength in the rupiah — which climbed to an eight-month high in February — is also reducing the need for further rate increases after the central bank hiked six times last year.

Indonesia is scheduled to sell bonds with maturities ranging from five to 30 years Tuesday after the previous auction on Feb. 26 drew a record $6.7 billion of bids. The extra yield on the nation’s two-year debt over the central bank’s policy rate shrank to a lowest on record this month, according to data compiled by Bloomberg starting in 2016.

Inflation in the Philippines slowed to 3.8 percent last month from a peak of 6.7 percent in September, pushing 10-year bond yields to the lowest since June. There’s room for easing if inflation keeps slowing, newly appointed central bank Governor Benjamin Diokno said at his first media briefing on Friday.

The Philippines will sell 20 billion pesos ($383 million) of 10-year bonds on Tuesday. The most recent offering on Jan. 8 drew the second-highest amount of competitive bids on record. Government securities have gained 5.5 percent in the first two months of the year, the best performers after Greece among 34 sovereign markets tracked by Bloomberg.

Malaysia’s bonds are also rallying due to a dovish central bank, which said last week inflation is likely to stay low due to policy measures, and it will continue to monitor downside risks in the economic and financial environment.

The yield curve has been bull flattening, with longer-maturity yields dropping faster than shorter-dated ones, amid expectations inflation will remain suppressed. The central bank appears ready to cut its policy rate if needed to support the economy, according to Bloomberg Economics.

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