Pimco Tempers Bullish Dollar View, Cuts Asia Bond Holdings

  • ‘Good time to dial down some of the risk,’ Luke Spajic says
  • Yuan to become a ‘lot more stable’ as National Congress nears

Pimco Is Expecting a Period of Global Uncertainty

Pacific Investment Management Co. has become less bullish on the dollar against emerging Asian currencies and says it trimmed investments in the region’s bonds as they are now relatively expensive.

“We still have a mild bias to be long dollars and underweight some Asian currencies, though what used to be a high conviction call is now a looser view, not a major core strong view,” Luke Spajic, head of portfolio management for emerging Asia at Pimco, said in an interview last week. “Given the valuations in rates, currencies and equities, it’s simply a good time to dial down some of the risk, raise some cash and see how markets evolve.”

Emerging Asian bonds from India to Indonesia dropped last week amid concern they had become too expensive following the biggest inflows in more than two years in the first quarter. Confidence in the reflation trade has waned following President Donald Trump’s failure to enact U.S. health-care reform and as disputes within his own party cast doubt on his growth agenda.

“We’re already into April, nothing’s been passed,” said Singapore-based Spajic, who is also chairman of the Asian portfolio committee at Pimco. “Meaningful legislative change may be more of a 2018 impact.”

The fund manager has “raised a bit of cash” in its Asian credit portfolios and is looking for opportunities, either in terms of new issues or a widening in spreads, he said.

Pimco has favored Indian and Indonesian local-currency bonds in the last 12 months as they offer among the highest yields in Asia, but is “dialing down the risk in both,” Spajic said. Indonesia’s debt appears to have largely priced in the prospect of a boost by S&P Global Ratings to investment grade, he said.

Yields on 10-year Indonesian and Indian bonds rose nine and 14 basis points, respectively, last week after retreating in each of the previous three weeks.

Cheapness Gone

“I’m kind of less excited about Indonesia now than I was two or three years ago,” Spajic said. “The real cheapness has gone.”

The Reserve Bank of India unexpectedly raised its reverse repurchase rate rate last week, while keeping its benchmark unchanged, effectively tightening policy to combat quickening inflation.

“From a long-term perspective India is just so fascinating as an investment opportunity,” Spajic said. “I would love to see more corporate credit issuance coming from India. I would like to see a sovereign bond issued because it would be a major marker for global capital markets.”

Pimco, based in Newport Beach, California, also favors Indonesian dollar-denominated bonds, along with those from Sri Lanka and Mongolia.

China’s yuan is set to be “a lot more stable” with the Communist Party’s twice-a-decade National Congress scheduled for later this year, Spajic said. Pimco, which oversees about $1.5 trillion, expects the currency to weaken by 4 to 5 percent in the 12 months through March 2018. Offshore yuan traded at 6.9079 per dollar as of 11.44 a.m. in Hong Kong Tuesday, having strengthened 1 percent this year.

Stability Infatuation

“Chinese policy makers are infatuated with stability, particularly in a year like this where no one really wants to be anywhere near a financial accident or a loss-of-face event,” Spajic said. “But further out, beyond a year, two years, I would expect the volatility to be bigger and the currency regime to shift a little to a wider band and eventually a move to a freer float.”

The People’s Bank of China opened the country’s interbank bond market to overseas institutional investors last year to attract long-term inflows amid a weakening currency and a flight of capital. Regulators are taking steps to further open the bond sector to boost the chance of inclusion in global debt-market indexes.

China may be added to emerging-market bond indexes as soon as this year, and if that happens, the country may be able to attract between $30 billion and $40 billion of inflows in 2017 and 2018, Spajic said. The nation will probably lure between $250 billion and $300 billion of cash if its debt is included in global aggregate bond indexes over the next few years, he said.

“There’s now an amazing acceleration and I believe the connectivity of these Chinese capital markets is going to have a transformation impact on finance globally,” he said.

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