Asian Bonds Climb Amid Expectations for Global Easing

Australia’s government bonds extended a record rally while yields on Singapore’s debt headed for an all-time low amid speculation global central banks will expand monetary easing to prop up growth.

China’s manufacturing shrank at the fastest pace since March 2009, a private report showed today, indicating the slowdown in the world’s second-largest economy is deepening. Japan’s 10-year note yield touched a three-week low after Federal Reserve Chairman Ben S. Bernanke said last week that he won’t rule out “nontraditional” policy tools if required to stimulate the U.S. economy.

“Markets kind of responded to the expectation that there will be some quantitative easing,” Peter Jolly, Sydney-based head of market research for National Australia Bank Ltd. said of the response to Bernanke’s speech. “That has flown through to all bond markets across Asia and Australia.”

Australia’s 10-year yield dropped three basis points to 3.06 percent as of 3:26 p.m. in Sydney. The yield fell for a 12th day, the longest stretch of declines since at least 1990, when Bloomberg began compiling daily data.

Singapore’s 10-year rate retreated eight basis points to 1.31 percent, set for the lowest close on record going back to 1998, according to data compiled by the Monetary Authority of Singapore. Japan’s benchmark yield fell as much as 1 1/2 basis points to 0.78 percent, a level unseen since Aug. 13. U.S. financial markets are closed today for the Labor Day holiday.

China’s Manufacturing

The purchasing managers’ index for China released today by HSBC Holdings Plc and Markit Economics had a final reading of 47.6 for this month, compared with 47.8 on a preliminary basis reported Aug. 23. The dividing line between expansion and contraction is 50.

China’s central bank lowered interest rates in June for the first time in three years and cut them again in July to support the economy through lower borrowing costs. Even so, the Shanghai Composite Index (SHCOMP) of shares declined on Aug. 30 to the lowest level since February 2009.

“I am quite concerned about China’s PMI,” said Akira Takei, head of the international fixed-income department at Mizuho Asset Management Co. in Tokyo, which oversees about $41 billion. Chinese officials “started to cut interest rates but that’s not going to be enough.”

U.S. Outlook

Speaking on Aug. 31 in Jackson Hole, Wyoming, Bernanke said the costs of “nontraditional policies” appear manageable when considered carefully. That implies Fed policy makers “should not rule out the further use of such policies if economic conditions warrant,” he said.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing, or QE. The Federal Open Market Committee will next gather on Sept. 12-13, followed by the Bank of Japan’s two-day meeting starting Sept. 18.

“Bernanke’s speech increased speculation that some form of additional monetary easing will be introduced soon,” said Jun Fukashiro, a Tokyo-based chief fund manager at Toyota Asset Management Co., which oversees about $24 billion. “If the U.S eases policy for longer, Japan will have to remain accommodative for a substantially longer period.”

The Reserve Bank of Australia is forecast to hold its benchmark rate at 3.5 percent tomorrow when RBA policy makers meet, a Bloomberg News survey of economists shows. Traders see a 50 percent chance that the central bank will cut the rate to at least 2.5 percent by March 2013, according to data on overnight- index swaps compiled by Bloomberg.

“We’ve already had a very discounted yield curve in the sense where it’s nearly 100 basis points of rate cuts priced for the year ahead, which is quite a deep discount,” said NAB’s Jolly. “It’s going to be hard for the yield to keep rallying with such a deep discount when the RBA is not moving.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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