Taiwan Bonds Fall in Conservative Tone Amid Central Bank Policy

  • Overnight certificate rate seen as benchmark vs discount rate
  • Slowing economy and contracting exports spur rate cut

Taiwan’s 10-year government bonds fell after the central bank kept what is seen as the de-facto benchmark rate on overnight certificates of deposit unchanged.

The Central Bank of the Republic of China (Taiwan) lowered its key discount rate by 12.5 basis points on Thursday to 1.5 percent, almost double the yield on 10-year notes. While it cut rates on 28-, 91- and 182-day certificates of deposit by 0.07 percentage point each, the same as in December, it left the overnight equivalent at 0.2 percent. The rate is seen as the actual benchmark because the central bank rate cannot be used by anyone in the market, according to Yuanta Securities Co.

"After the discount rate cut, the overnight rate didn’t move, so bond traders are now quite conservative,” said Tobby Lin, a fixed-income trader at Yuanta Securities in Taipei. “The overnight rate is already close to zero, so there’s limited space for further declines and the room for additional monetary easing is narrowing.”

While Taiwan’s economy expanded last year at the slowest pace since a contraction in 2009 and exports have slumped for 13 straight months, the island has still lured $4.2 billion to local stocks this year, the most among eight Asian markets, Bloomberg-compiled data show. CBC Governor Perng Fai-nan said monetary easing can help narrow Taiwan’s rate gap with the rest of the world and curb inflows. Such language suggests inflows and the exchange rate "have taken over as the primary consideration in future rate decisions," said Gary Yau, a strategist at Credit Agricole CIB in Hong Kong.

The 10-year yield rose two basis points to 0.82 percent and the five year yield climbed three basis points to 0.54 percent, Taipei Exchange prices show. Taiwan’s dollar fell 0.1 percent to NT$32.766 versus the greenback, taking the week’s loss to 0.8 percent, according to prices from Taipei Forex Inc.

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