Goldman Sachs Asset Management is betting that bond yields will rise in South Korea and Malaysia as increased volatility in China pushes up risk premiums and U.S. economic strengthening buoys rates globally.
While the fund manager predicts that rates will increase across Asia, it sees Malaysia and Korea as the most expensive markets, according to Philip Moffitt, head of fixed income for the Asia-Pacific region at Goldman Sachs AM. The money manager, which has more than $1 trillion in assets under supervision globally, is using both the sovereign swap market and currencies to position for the predicted moves, he said.
“Prices will go back to more rational levels,” Moffitt said in an interview in Sydney on March 25. “We think rates are going to rise, partly because there’s an expansion in risk premium because of Chinese noise, but also because of an expansion of rates globally because U.S. rates are going up.”
Both South Korea and Malaysia have seen a lot of domestic credit creation, which exposes their economies to refinancing risks, he said.
China’s economy, the world’s second largest, is showing signs of slowing as the nation’s leadership attempts to curb credit risks, reduce pollution and implement more market-based pricing. A private report this month showed a gauge of Chinese manufacturing weakened in March for a fifth-consecutive period, while the country also saw its first onshore market bond default.
In the U.S., the Federal Reserve has begun the process of reducing its monthly bond purchases as evidence mounts that the world’s biggest economy is strengthening, and that has spurred an increase in benchmark bond yields.
The 10-year U.S. government bond yield has climbed more than a percentage point from its 2013 low to 2.70 percent as of 12:08 p.m. today in Tokyo, Bloomberg Bond Trader prices show. It is predicted to reach 3.35 percent by the end of this year, according to the weighted average of forecasts compiled by Bloomberg.
The equivalent Korean rate was at 3.54 percent yesterday, compared with a 2013 low of 2.73 percent, while the 10-year Malaysian benchmark has risen to 4.11 percent from last year’s nadir of 3.08 percent. The yield on comparable Chinese notes was 4.51 percent yesterday versus 3.41 percent, which was the lowest in the 12 months to Dec. 31.
“Where we’d really be short rates if you could express it freely and easily would be China,” Moffitt said. While yields in China are also too low in Moffitt’s view, he sees the offshore Chinese market as expensive and “clunky” to work within. Positioning in markets like Korea and Malaysia “are much better ways to express the view,” he said.
The asset manager is also betting on an increase in Japanese interest rates and a depreciation of the yen amid risks that policies being implemented by the Bank of Japan and Prime Minister Shinzo Abe will stumble. The premier’s so-called Abenomics aims to consolidate Japan’s finances by reviving growth as the nation’s debt pile reaches 2 1/2 times gross domestic product.
The yen may weaken to as low as 115 per dollar from its current level of 101.85 within 12 months, while the benchmark 10-year Japanese government bond yield may rise to as high as 1.25 percent from 0.63 percent, the money manager said.
“If you don’t have follow-through with wage rises, and therefore some consumption increase, the Abenomics process starts to falter,” Moffitt said. Domestic demand for Japanese bonds is weakening at the same time as the market is questioning the impact of the reform process, he said.
“We think the Bank of Japan will do more, but how effective they can be doing more if they’re not getting the traction with wage growth,” is questionable, he said. “They just keep driving up asset prices.”