Taiwan Bonds Show Risk Aversion as New Leader Tests China Ties

  • Concern grows about president-elect’s stance on China ties
  • Survey suggests traders expect another rate cut in June

Tsai Ing Wen.

Photographer: Sam Yeh/AFP via Getty Images

Taiwan’s government has seen bond yields fall to record lows as investors seek the safety of sovereign debt amid concern of increased tensions with China and bets that the central bank will cut interest rates to revive economic growth.

The finance ministry auctioned NT$30 billion ($920 million) of the notes maturing in May 2046 at 1.65 percent yesterday, below the 1.705 percent fetched in November 2012. That followed an April sale in which 20-year bonds were auctioned for a record low yield of 1.36 percent, while 10-year bonds are also trading near their low of 0.767 percent.

President-elect Tsai Ing-wen, who takes office this Friday, has spurred irritation among Chinese leaders refusing to affirm the “One-China” principle that says the two are part of one country. She must balance pressure from Beijing against the demands of an electorate wary of the tighter relationship that the outgoing president, Ma Ying-jeou, forged with the island’s largest trading partner.

“The need to hedge risk still exists,” said Tommy Gu, a Taipei-based fixed-income trader at Capital Securities in Taipei. The inauguration of Tsai’s government and uncertainty in cross-strait relations may be spurring demand for less risky products, he said.

The Democratic Progressive Party chairwoman will take the helm of an economy that has contracted for three straight quarters, suffering the effects of China’s own slowdown. Gross domestic product fell 0.84 percent in the three months through March from a year earlier, dragged down by slower exports and waning demand for electronics.

Traders are also forecasting a cut to the benchmark interest rate when the central bank meets in June, with 14 of 20 economists surveyed by Bloomberg expecting a reduction.

“The trend of record-low bond yields reflects the market’s expectation that the central bank will cut rates again in June,” said Lucas Lee, an economist at Mega Securities Co. in Taipei. He said the forecast for 2016 growth “may be revised down again and monetary policy will remain loose.”