Asia’s Emerging Markets Escape Inverted Yield Curve

(Bloomberg) – Southeast Asian sovereign bonds may continue to outperform their emerging market peers at maturities of up to three years, thanks to lower inflation and steep yield curves that contrast with the global economy. flattening observed in other regions.

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Benchmark interest rates that are still at historically low levels have kept yield curves between about 1 and 2 standard deviations above the five-year average in Indonesia, Thailand, the Philippines and Malaysia, according to a Bloomberg analysis of 10 markets.

By comparison, yield curves are more than 2 standard deviations lower than the five-year average in many key markets in Latin America and Central and Eastern Europe, according to the analysis.

While Southeast Asia is not immune to inflationary pressures that can erode short-term bond yields, strategists see the region’s central banks under less pressure to react as quickly as possible. their counterparts elsewhere with rate hikes.

Rising energy costs are expected to be most acute in Europe, while Malaysia benefits as an oil exporter and Indonesia benefits from rising raw materials as a supplier of everything from palm oil tin. Rice’s position as a staple food in Asia also mitigates the impact of soaring wheat prices on food costs.

“The region’s economies have been able to maximize export production for much of the past two years,” said Sue Trinh, head of macro strategy for Asia at Manulife Investment Management in Hong Kong, citing the importance of trade surpluses.

“At the same time, the surge in pent-up demand in Asia after the reopening has not been as strong compared to other regions, especially compared to other emerging economies,” she said.

Policymakers raised benchmark rates above pre-pandemic levels in Poland, Hungary, the Czech Republic, Brazil and Chile.

By contrast, in Thailand, where inflation accelerated last month at the fastest rate since 2008, the central bank may delay raising rates until the first quarter of next year, according to median estimates. compiled by Bloomberg.

“Southeast Asia is likely to be less vulnerable to inflation initially, suggesting local debt could outperform, while bond curves elsewhere could invert as central banks try to outpace the markets. inflation risks,” said Jon Harrison, Managing Director of Emerging Markets Macro Strategy. at TS Lombard in London.

The spread between Polish 2- and 10-year government bonds turned negative in March as short yields outpaced longer yields. A similar inversion occurred in the Czech and Brazilian bond yield curves.

Bonds from Malaysia and Indonesia have offered returns of 0.3% and -0.9% since Russian stocks escalated against Ukraine, placing them among the top five performers of 19 major emerging markets in a gauge Bloomberg local currency government bonds. The index recorded losses of 3.4% between the close of February 18 and March 9.

(Updated bond yields in last paragraph)

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