Taiwan Bonds Rally as Further Easing Seen After Policy Rate Cut

  • Rate decision predicted by 11 of 24 economists in survey
  • Taiwan dollar fell 1.9% this week, the most in four years

Taiwan’s government bonds rallied as the central bank’s first policy rate cut since 2009 fueled speculation it will ease again to spur growth. The island’s currency retreated, capping the biggest weekly loss in four years.

The authority, known as CBC, reduced the benchmark rate to 1.75 percent from 1.875 percent, a decision forecast by 11 of 24 economists surveyed by Bloomberg. Governor Perng Fai-nan cited a widening negative output gap and next year’s weak inflation outlook. The central bank’s dovish tone indicates a high chance for further cuts, according to Claire Huang, an economist at Societe Generale SA. Australia & New Zealand Banking Group Ltd. said CBC had formally declared the start of a monetary easing cycle.

"After the Taiwan dollar depreciated beyond NT$33 on Wednesday, expectations for a rate cut had cooled, so it was a surprise," said Sandy Liao, a bond trader at Ta Chong Bank Ltd. in Taipei. "There’s a chance for another rate cut in December, especially if the U.S. doesn’t hike."

The yield on government bonds due September 2025 dropped five basis points to 1.147 percent, while the five-year yield fell four basis points to 0.792 percent, Taipei Exchange prices show. The 10-year yield has slid 36 basis points this quarter, touching a record low of 1.06 percent on Aug. 25.

Whether yields fall to such levels again will depend on the stock market, Liao added. The Taiex index rose 0.1 percent, trimming its weekly decline to 3.9 percent.

Currency Retreats

Taiwan’s dollar fell 0.1 percent to NT$33.292 versus the greenback, Taipei Forex Inc. prices show. Its 1.9 percent drop for the week marked the biggest retreat in four years.

One reason to cut the key rate would be to weaken the local dollar to boost exports, Mark Walton, an economist at BNP Paribas SA, said before the decision. While this will remain a "prime motivation" at December’s meeting, a U.S. rate increase would also help CBC achieve the same goal, he wrote in a note on Thursday. Federal Reserve Chair Janet Yellen said an increase is likely to happen this year.

One-month non-deliverable forwards for Taiwan’s dollar climbed 0.7 percent to NT$33.099, after falling 1.2 percent on Thursday, data compiled by Bloomberg show.

While the rate cut was "a bit of a surprise," the spot rate and forwards may have stabilized because the yuan advanced, said Eddie Cheung, a strategist at Standard Chartered Plc in Hong Kong. The Chinese currency gained 0.13 percent on Friday in Shanghai.

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