Asian bonds flying as Fed cut drives investors to emerging markets

Thursday, 5 March 2020 02:49 - - {{hitsCtrl.values.hits}}

Singapore (Reuters): Asian bonds soared on Wednesday after a surprise interest rate cut in the United States sent investors rushing back to high-yielding sovereign paper they had been abandoning only days ago.

Yields, which fall when prices rise, hit record lows along the short end of the curve in South Korea, plunged in higher-paying markets such as Indonesia and India and fell heavily in Singapore.

The yield on 10-year Indonesian government bonds dropped more than 23 basis points to 6.637% - the sharpest drop in nearly nine months. They have fallen 41 basis points in two days, retracing most of a 45 basis point jump late last week.

The yield on Singapore’s 10-year paper fell 10 basis points to 1.352% for its sharpest drop in almost four years, while two-year yields fell as far as 12.7 basis points to their lowest since 2017.

Indian 10-year bond yields fell 10 basis points to 6.241%.

“With U.S. yields going yet lower, the yield differential factor appears to be coming back into play for some local currency bonds,” said Frances Cheung, head of emerging Asia currency and rates strategy at Westpac.

“The search for yield may be coming back as U.S. dollar yields fall.”

The Fed dropped its benchmark funds rate half a percentage point overnight, its first off-schedule cut since the depths of the global financial crisis in 2008, sending U.S. 10-year yields to a once-unthinkable low of 0.9060%.

At the same time, Indonesia has stepped up its own stimulus measures and the central bank has vowed to increase intervention to support the currency and stem capital outflows.

The Indonesian rupiah rose more than 1% against the dollar on Wednesday, its best daily gain in over a year.

South Korea’s won also rallied as much as 1% in onshore trade as foreigners piled back into the stock market and helped push one-year, three-year and five-year bond yields to record lows.

However, with the region on the front line of the coronavirus epidemic’s economic fallout, currencies are likely to come under further pressure.

Nomura, Japan’s biggest brokerage and investment bank, said in a note on Wednesday that it had increased a bet on a decline in the Singapore dollar and that it expects the won to fall against the yen.

“Our key convictions are to position for increased downside in global growth and policy-easing risks,” Nomura’s analysts said.