Deutsche Bank Reduces Asian Bond, Currency Bets on U.S. Slowdown Prospects

Asian currencies and bonds are at a “tipping point” because a decline in U.S.-bound exports will weigh on economies in the region, according to Deutsche Bank AG.

The bank reduced weightings of currencies from China, Indonesia and Singapore in its model portfolio for Asian bond investors, Martin Hohensee, Singapore-based head of Asia fixed-income research for Deutsche Bank, wrote in a note dated yesterday. Declines in the Institute for Supply Management’s U.S. manfacturing gauge point to a contraction in Asian exports and serious implications for the region’s currencies, he wrote.

ISM’s factory index dropped to 52.7 in August, the lowest since September 2009, from 55.5 in July, according to the median estimate of 78 economists surveyed by Bloomberg News before the data’s release today. Readings greater than 50 signal growth.

A decline in the index toward 45 “would foreshadow a pretty sharp decline in Asian exports,” Hohensee said in a telephone interview today. “Earnings expectations, which are somewhat inflated, would get revised down sharply.”

Deutsche Bank increased the model portfolio’s exposure to dollars and extended the duration of its Treasury holdings to seven to 10 years, the report said. Duration is a measure of a bond’s sensitivity to changes in yield, and a larger number reflects a more bullish position.

A decline in the ISM index to 45 would help push 10-year Treasury yields to less than 2 percent, Hohensee wrote, from 2.50 percent today.

Demand for Asian assets has grown this year as Europe’s debt crisis and doubts about the U.S. economic recovery curbed investor appetite for the biggest economies, he wrote in the report. As the economic outlook worsens, investors will flee riskier Asian assets, he said.

“The imminent decline in ISM thus takes us much closer to a tipping point for Asian currencies,” Hohensee wrote.

To contact the reporter on this story: Yuki Yamaguchi at yyamaguchi10@bloomberg.net.

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