Shorter tenor Asian bonds can combat tariff-led volatility
Emerging Asian bonds with shorter tenors may be less exposed to any volatility in US rates, relative to their longer-dated peers, due to interest-rate cuts in local markets.
A Bloomberg analysis showed shorter-term emerging Asian debt moved less in tandem with two-year US yields compared with the region鈥檚 10-year bonds. That means front-end bonds of five Asian nations can better withstand any possible tariff-induced resurgence in US yields as local policy makers diverge from the Federal Reserve and cut interest rates.
The relative attractiveness of shorter-dated emerging Asian bonds is coming into view as investors grapple with incremental tariff headlines. US President Donald Trump made contradictory remarks on the timing of Canada and Mexico levies, before a White House official said the deadline remains on March 4. A report on possible reciprocal tariffs is also due in April.
鈥淭he probability of US tariff escalation remains high as the trade review on China nears completion and reciprocal tariff policies are evaluated,鈥 said Rajeev De Mello, portfolio manager at Gama Asset Management SA.
He recommends investors to position along shorter-to-mid maturity interest-rate swaps or local-currency bond curves as monetary policy across emerging Asian economies shifts toward easing.
The possibility of US tariffs on Canada and Mexico had pushed up two-year US yields earlier this month as traders bet the move would fuel inflation and prevent further interest-rate cuts from the Federal Reserve. Even though US yields have fallen in recent sessions, Fed officials like Raphael Bostic and Thomas Barkin this week signaled that US rates will need to remain restrictive to tame inflation.
The correlation between the two-year US yield and 10-year Malaysian debt stands at 0.5, while that between 2-year Treasury yields and the three-year ringgit bonds was 0.2, as per Bloomberg analysis. That implies bigger downside for Malaysia鈥檚 longer-dated notes should escalation in global trade tensions push up US rates.
鈥淔ront-end rates offer somewhat lower exposure鈥 to shifting market pricing around tariff risks, supported by continuation of interest-rate cuts among emerging market central banks this year, Goldman Sachs Group Inc. strategists including Kamakshya Trivedi and Danny Suwanapruti write in a Feb. 12 note.
Bank of Thailand unexpectedly trimmed interest rates by 25 basis points on Wednesday. Bank of Korea also made a similar rate reduction, with BOK Governor Rhee Chang-yong signaling one or two more quarter-point cuts this year.
Bangko Sentral ng Pilipinas stuck to its guidance for a cumulative 50 basis points of rate easing this year, and said it will slash reserve requirement ratio for big banks by 200 basis points next month. Interest rate cuts are favorable for sovereign bonds, particularly notes on the shorter end of the yield curve.
Shorter dated yields in Indonesia, Malaysia, Thailand, the Philippines, India and South Korea have declined by an average 15 basis points, while 10-year yields have slipped by an average of six basis points this year. — Bloomberg
