Asian Bond Risk Falls as Fed Steers Rates Away From Zero

  • Regional CDS gauge poised for its third straight daily decline
  • Cost of protecting debt also falls in Japan, Australia

Asian bond risk fell for a third-straight day as traders took in their stride the first U.S. interest-rate increase in almost a decade.

The Markit iTraxx Asia index of credit-default swaps fell 2 basis points to 135 basis points as of 1:02 p.m. in Hong Kong, according to Westpac Banking Corp. prices. The gauge has declined from a two-month high of 145 basis points on Monday, CMA data show.

Investors’ appetite for credit improved as the Federal Reserve signaled its confidence in the U.S. economy by proceeding with its much-anticipated tightening of monetary policy. The quarter-point increase is Chair Janet Yellen’s first step away from a near-zero fed funds rate that has been in place since the 2008 financial crisis and may act as a guide for other monetary authorities that have also implemented unprecedented levels of easing.

“This is an encouragement for all central bankers, we have an exit,” said Genzo Kimura, a Tokyo-based economist at Sumitomo Mitsui Trust Bank Ltd. “It’s good that they succeeded.”

Easing Elsewhere

While the strengthening U.S. situation has allowed the Fed to embark on a process of increasing rates, other major central banks have shown little sign that they’re going to dial back stimulus any time soon as they seek to bolster their economies. European Central Bank President Mario Draghi this month announced a new round of supportive measures, while economists are divided over the prospect of further easing from the Bank of Japan. The People’s Bank of China has reduced its benchmark interest rate six times since November 2014.

Among Asian economies, China has the most room for more monetary easing, which should make notes from the world’s second-largest economy the least affected by the Fed’s move, according to Ken Hu, the Hong Kong-based chief investment officer for Asia-Pacific fixed income at Invesco Ltd.

Mark Haefele, global chief investment officer for UBS Wealth Management, said he expects the U.S. and global economies to cope with the Fed’s “gentle rate hiking cycle,” and reckons more relaxed policies in China, Japan and Europe will continue to support credit conditions.

The cost of protecting debt against non-payment fell in Japan following the Fed announcement, with the country’s CDS index dropping 2 basis points to 71 basis points as of 2:01 p.m. in Tokyo, based on Citigroup Inc. prices. The iTraxx Australia gauge was down 0.5 basis point to 129 as of 5:22 p.m. in Sydney, according to Citigroup prices.

“With some uncertainty around the Fed being removed, that can provide some support to markets,” said Kenneth Akintewe, a Singapore-based senior investment manager at Aberdeen Asset Management.

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