Taiwan 5-Year Bonds Have Best Week in Two Months on Fed Optimism

Taiwan’s five-year bonds completed the best week in almost two months on speculation the Federal Reserve will hold off from cutting asset purchases after U.S. first-quarter growth trailed an earlier estimate.

The world’s largest economy expanded at a revised 1.8 percent rate in the first three months of 2013, official data showed June 26, short of a prior assessment of 2.4 percent. Fed Chairman Ben S. Bernanke said June 19 the central bank may trim its $85 billion a month of debt buying this year and end it in 2014 as long as the economy performs in line with its projections. Taiwan held interest rates for an eighth review yesterday after the government cut its 2013 growth forecast and as a cash crunch in China threatened the economic outlook.

“Volatility’s been really high lately, due to uncertainties over the timing of the Fed’s exit,” said Samson Tu, a Taipei-based fund manager at Uni-President Assets Management Corp., which oversees $700 million. “Taiwan’s financial markets are less prone to the risk of outflows compared with countries like South Korea.”

The yield on the 0.875 percent notes due January 2018 fell four basis points, or 0.04 percentage point, this week to 1.005 percent in Taipei, according to Gretai Securities Market prices. That’s the biggest drop in benchmark five-year rates since the five days ended May 3. The yield slipped one basis point today, and was little changed this month and since March 31.

The Taiwan dollar rose 0.5 percent from the end of last week to NT$30.12 against its U.S. counterpart, Taipei Forex Inc. prices show. The currency strengthened 0.2 percent today and since May 31.

Central Bank

The local dollar was trading 0.7 percent stronger one minute before the 4 p.m. close. The central bank has sold the currency in the run-up to the close on most days in the past year, according to traders who asked not to be identified.

“The Fed’s potential scale-back of bond buying and China’s liquidity problems affect the prospects of global economic growth,” Central bank Governor Perng Fai-nan said yesterday. “Keeping interest rates unchanged will ensure a stable economic recovery and inflation outlook.”

One-month non-deliverable forwards gained 0.7 percent this week to NT$29.955 against the greenback, according to data compiled by Bloomberg. The contracts climbed 0.2 percent today. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose five basis points to 5.49 percent during the five-day period and climbed one basis point today.

The overnight interbank lending rate was little changed at 0.391 percent, according to a weighted average compiled by the Taiwan Interbank Money Center.

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