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DBS’s Wrong Call on Timing of Fed Tapering Cuts Treasury Income

DBS Group Holdings Ltd., Southeast Asia’s largest lender, said a bad call on when the U.S. Federal Reserve would begin to curtail its bond-purchase program led to lower treasury-related income in the third quarter.

The bank pared holdings of longer-maturity U.S. Treasury instruments, hedged its bond holdings and took in more dollar-denominated fixed deposits in anticipation of the Fed winding back the stimulus starting in September, DBS Chief Executive Officer Piyush Gupta told reporters in Singapore today.

The Fed said Sept. 18 it would continue purchasing $85 billion of government bonds a month, citing the need to see more improvement in the U.S. economy. The decision, which surprised economists, sent the nation’s equities to record highs and triggered a rally in Treasuries that sent 10-year yields to a three-month low on Oct. 23.

“We basically got the call on Fed tapering wrong,” said Gupta. When the stimulus measures weren’t curtailed, DBS’s hedges on its treasury positions started going “out of the money” and the surplus dollars it was left with had to be put into the interbank market, he said.

Trading income, which is a component of treasury-related income, fell 21 percent in the three months ended Sept. 30 from the previous quarter to S$225 million ($181 million), the Singapore-based lender said in a statement to the city’s stock exchange today. Treasury income from customer flows declined 19 percent from the previous quarter to S$228 million.

DBS’s net income for the period rose to S$862 million from S$856 million a year earlier. That beat the S$839 million average of seven analysts’ estimates compiled by Bloomberg.

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