Taiwan Five-Year Yield Falls Most in Three Weeks on Fed Pledge

Taiwan’s bonds rallied, with the five-year yield falling the most in three weeks, after the Federal Reserve pledged to maintain its stimulus program.

While data in the U.S. showed the economy grew more than economists estimated in the second quarter, the Fed said yesterday that persistently low inflation poses risks to the nation’s outlook, two days before the Labor Department releases non-farm payroll figures. Taiwan’s benchmark five-year yields rose to the highest level in more than three weeks yesterday after the government set the cutoff yield higher than traders forecast at an auction on July 30.

“Non-farm payroll numbers will give the market more direction on the timing of the Fed’s tapering,” said Vince Lin, a Taipei-based trader at Concord Securities Corp. “In the long run, the direction of bond yields will be determined more on the finance ministry’s attitude in the primary market.”

The yield on the 0.875 percent government bonds due January 2018 fell three basis points to 1.095 percent in Taipei, according to Gretai Securities Market. That’s the biggest drop since July 11.

The Ministry of Finance sold NT$26.3 billion ($875 million) of 30-year notes, short of the NT$30 billion offered, at a cutoff yield of 2.5 percent, according to an official statement. The median estimate of traders surveyed by Bloomberg was 2.3 percent.

Currency Steady

Taiwan sells bonds through Dutch auctions where investors bid on the yield and the government sets the coupon by taking the highest winning offer. While a cutoff yield is set at each sale, the Treasury only imposes it if the highest bid exceeds the limit.

The Federal Reserve said yesterday that its debt buying, which has spurred the flow of funds to emerging markets, will remain at $85 billion a month.

The Taiwan dollar was little changed at NT$30.125 against its U.S. counterpart, Taipei Forex Inc. prices show. The currency was trading 0.5 percent stronger 18 minutes before the 4 p.m. close. The central bank has sold the island’s dollar in the run-up to the close on most days in the past year, according to traders who asked not to be identified.

One-month non-deliverable forwards were steady at NT$30.035 per dollar as of 5:16 p.m. in Taipei, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 11 basis points, or 0.11 percentage point, to 3.9 percent.

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