Asian bond markets are unlikely to see a repeat of the rout in the middle of the year when the Federal Reserve eventually tapers stimulus, according to BlackRock Inc., the world’s largest money manager.
The average yield on local-currency debt from the region rose 1.48 percentage points to this year’s high of 5.89 percent on Aug. 29 from 4.42 percent on May 22, the day the Fed first said it could reduce its $85 billion of monthly bond purchases, JPMorgan Chase & Co’s GBI-EM Global Diversified Asia Yield to Maturity index shows. The rate was 5.56 percent on Nov. 29.
“If we look at where we are right now, markets are much more rational in terms of factoring it in,” Joel Kim, Singapore-based head of Asia Pacific fixed income at BlackRock Inc., which oversaw $4.1 trillion at the end of September, said at a briefing in Singapore today. “In the middle of the year you saw the noise on tapering coincide with a lot of actual tightening expectations being priced into the yield curves.”
Federal Reserve officials said they might reduce stimulus known as quantitative easing “in coming months” as the economy improves, according to minutes of the Oct. 29-30 gathering released on Nov. 20 before their next meeting on Dec. 17-18. The U.S. central bank probably won’t taper its debt purchases until March, according to a Bloomberg News survey conducted Nov. 8. The yield on 10-year Treasuries (USGG10YR) has risen 75 basis points to 2.79 percent since May 22.
BlackRock prefers to invest in short-dated bonds to guard against losses as U.S yields increase, and will be using other funding currencies such as the euro and Japan’s yen, rather than dollars, to invest in Asia, Kim said.
“It’s going to be a bit more challenging for Asian currencies to do very strongly against the dollar,” he said. “In terms of managing Asian currency risk, it matters what sort of funding currency you pick. We also know that in Japan and Europe monetary policy still centers on further easing.”
The Bloomberg-JPMorgan Asia Dollar Index plunged 2.8 percent from May 22 to this year’s lowest level on Sept. 3, before rebounding 1.9 percent. China’s yuan and South Korea’s won have been the best performers among the 11 most-traded Asian currencies this year, appreciating 2.3 percent and 0.7 percent against the greenback, respectively.
BlackRock prefers the yuan, through short-dated Dim Sum bonds, Kim said. It also likes the won over Southeast Asia’s commodity-driven currencies, as South Korea’s economy will benefit more from a recovery in developed markets, he said.
“Hopefully, moving into a post QE environment, it’s about better U.S. growth, and therefore better global growth, and that would be good for returns longer term in Asia,” Andrew Swan, head of Asian equities at BlackRock, said at the same briefing from Hong Kong.
To contact the reporter on this story: Lilian Karunungan in Singapore at email@example.com