Fed's rate cut drags bond yields to all-time lows across Asia

Bond yields tumbled to record lows from Sydney to Seoul, reflecting a volatile mix of fear over the coronavirus fallout and the rush for higher returns after Treasuries entered uncharted territory.

Yields for short-term debt in Australia and South Korea dropped almost 10 basis points on bets of more policy easing. Indonesia and Indian bonds, among the region's high yielders, also saw double-digit rate declines as investors pivot towards risk assets.

With 10-year US Treasury yields slipping below 1 per cent for the first time, and a continued slide expected, a rout in Asia's emerging market (EM) debt screeched to a stop. Indonesia, which last month saw its worst bond outflow since 2011, was the best example of a sudden pivot even if doubts persist.

"We are in uncharted territory where US yields are at an all-time low, and dragging EM Asia yields along," said Mr Edward Ng, a money manager at Nikko Asset Management Asia.

"While the levels are tempting for investors to fade the move, the timing isn't the most assuring, given that there is still much uncertainty over the extent of the virus outbreak in the rest of the world."

For now, the United States Federal Reserve's emergency rate cut of 50 basis points is pumping dollar liquidity into the market, emboldening some funds to take a bet on emerging market assets.

Yields on Indonesia's benchmark 10-year bonds dropped by 25 basis points, the most since December 2016 on a closing basis. In India, they declined by as much as 13 basis points to levels not seen since 2016.

Inflation-adjusted 10-year yields across 23 emerging markets averaged 0.69 per cent at the end of last month, according to data compiled by Bloomberg - giving them an advantage of 188 basis points over developed markets, many of which are mired in negative rates.

"The Fed's surprise inter-meeting cut has echoes of the 2008 global financial crisis, focusing minds on the severity of Covid-19's rapid spread," said macro strategist Chang Wei Liang at DBS Bank in Singapore. "Asian central banks are likely to join the concurrent easing to mitigate risks from the global outbreak."

Central banks in Australia and Malaysia cut rates on Tuesday ahead of the Fed, and speculation is rife that the Bank of Korea will follow suit after its governor held an emergency meeting with officials. The Reserve Bank of India has also said there is room to ease as the nation reports its first virus cases.

Overnight index swaps are now priced for the Reserve Bank of Australia to lower rates by another 25 basis points next month. Money markets indicate about an 80 per cent chance of a cut of 50 basis points by New Zealand this month. Even the Bank of Japan is now seen as leaning towards a cut.

"A coordinated global central bank accommodation would create an asymmetric risk reward for owning duration assets," said Ms Jennifer Kusuma, senior Asia rates strategist at the Australia and New Zealand Banking Group. It reduces risks on the currency front, which would support foreign inflows in some Asian bond markets, she added.

The rally in Asian debt has been matched by a surge in their currencies, with the Indonesian rupiah jumping 1.2 per cent against the US dollar in its biggest one-day advance in more than a year. Other than the Indian rupee, which was buffeted by coronavirus fears, every emerging-market currency in the region advanced.

The question is "whether the virus could twist the short-end money markets further", said fixed income strategist Kang Seung-won at NH Investment & Securities.

"Short-end bond markets are messed up and investors must bear in mind that this type of situation could be prolonged."

The yield on the benchmark 10-year US Treasury notes sank as much as 25.9 basis points to 0.9043 per cent on Tuesday, though it rebounded to finish the day at around 1 per cent. In a sign of deep concern about the growth outlook, the yield on 30-year inflation-linked Treasuries fell below zero for the first time.

"There is some sense that the Fed is kind of shooting their bazooka off and might know something else, that this pandemic might get substantially worse in the US," said Mr Donald Ellenberger, a senior portfolio manager at Federated Investors. "This is a market that is simply being driven by fear."

However, most Asian equities rose yesterday after the Fed's rate cut to combat the economic fallout from the coronavirus - brushing off a Wall Street sell-off that was fuelled by concerns that the US central bank was panicking.

Tokyo ended up 0.1 per cent, while Shanghai added 0.6 per cent. Singapore, Wellington, Taipei and Bangkok also rose, with Jakarta up 2 per cent on hopes of further Indonesian government stimulus.

Seoul was the standout, surging more than 2 per cent as South Korea - the country worst hit by the virus outside China - reported a sharp drop in new infections.

But Hong Kong dipped 0.2 per cent as a gauge of Hong Kong manufacturing, construction, wholesale, retail and services fell to its lowest level on record last month.

The market was being supported by the move by the city's de facto central bank in cutting rates with the Fed, owing to the local dollar's link to the US currency.

"As the spread of the coronavirus continues and the chances of containment become slimmer, the impact on the global economy is likely to be sizeable," said Ms Anna Stupnytska of Fidelity International.

"While easier monetary policy helps sentiment, central banks should not be acting in isolation - the governments should step in with fiscal measures that are timely and well designed, supporting the economies that struggle not just from the virus itself but also from preventative measures that - in some cases - have ground activity to a halt."

BLOOMBERG, REUTERS, AGENCE FRANCE-PRESSE