Bond Bulls in India Brace for More Losses in 2018: Macro Week

  • Goldman, Morgan Stanley see higher RBI policy rates in 2018
  • Nomura sees rate hikes in Taiwan, Malaysia, Philippines

The narrative on India’s monetary policy path is fast changing toward higher interest rates, signaling more losses in 2018 for bond investors who are still nursing their wounds from this year.

One-year interest-rate swaps climbed to 6.31 percent this week, the highest since June. Traders are warming up to the idea the Reserve Bank of India may be done cutting rates and its next move will be upwards. South Korea took the lead on Nov. 30 to be the first major Asian central bank to raise interest rates since the Federal Reserve began its tightening cycle in late 2015.

Sovereign bonds in India capped a four-month loss in November, the longest losing streak since September 2013, as quickening inflation and expectations of faster economic growth hurt sentiment. The yield on the benchmark 10-year bond rose 20 basis points to 7.06 percent last month, a contrast from Indonesia and South Korea where yields declined while similar-maturity rates in Malaysia were little changed.

More Asian nations are expected to follow South Korea in tightening policy as rising oil prices fan inflationary pressures and the Fed raises interest rates. Goldman Sachs Group Inc. and Morgan Stanley forecast the RBI to start lifting borrowing costs in 2018. Nomura Holdings Inc. expect Taiwan, Malaysia and the Philippines to do likewise next year.

“We have had a constructive view on Asian bonds, but as 2018 approaches we need to take a selective stance,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura. “Asian central banks’ rhetoric is already turning hawkish given risks to inflation from rising oil prices, U.S. policy normalization and improving growth expectations.”

Bonds in India, Indonesia and Thailand are most the vulnerable to costly crude, while Singapore, Australia as well as Thailand will come under pressure from firmer U.S. rates, according to Rajpal.

“The jump in swaps and yields is indicating India’s vulnerability to higher oil prices and the market’s expectation that rate cuts are over, and the next move from the RBI is going to be a hike,” he said.

IndusInd Bank Ltd. projects India’s 10-year sovereign yield to climb to 7.10 percent by the end of December, while Emkay Global Financial Services Ltd. predicts it may rise as high as 7.50-7.80 percent in the next six-to-12 months.

India’s economy grew 6.3 percent in the third quarter, missing the 6.4 percent median forecast and giving the RBI some room to hold policy rates when it meets this week.

Below are key Asian economic data and events due this week:

  • Dec. 4: Australia Melbourne Inst. Inflation and ANZ job ads, Indonesia CPI
  • Dec. 5: RBA rate decision, Australia BoP, Australia retail, China Caixin PMI, Japan PMI, India PMI, South Korea BoP, CPI in Taiwan and Philippines
  • Dec. 6: RBI rate decision, BOJ Masai makes a speech, Australia GDP, Malaysia trade
  • Dec. 7: Australia trade balance, FX reserves data for China and Malaysia, Indonesia consumer confidence
  • Dec. 8: Japan GDP, New Zealand manufacturing activity, Australia home loans, Thailand exports and FX reserves
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