Traders across Asia making rate-cut bets

SINGAPORE – Traders accustomed to aggressive interest-rate hikes across Asia are now seeking to gauge when the region’s central banks will begin cutting, a pivot that will potentially support a nascent rally in bonds.

Central banks across Asia raised rates forcefully over the last year to combat stubborn inflationary pressures, with borrowing costs in economies such as South Korea and the Philippines rising beyond their highest levels in a decade.

Amid signs that inflation in the region is now slowing, the narrative among market participants has shifted from “peak rates” to rate cuts, which should help drive a rebound in sovereign debt.

“We now believe all Asian central banks are done hiking rates, in line with the deep slump in exports and easing inflation,” said Mr Rob Subbaraman, Singapore-based head of global markets research at Nomura Holdings.

The bank’s analysts see cuts as early as August for South Korea, and October for India.

Prospective rate cuts will spur further gains in fixed-income instruments, with a Bloomberg index of emerging Asia bonds having already gained 3 per cent this year amid signs that the Federal Reserve may be nearing the end of its rate-hike cycle. This is after a loss of 7.6 per cent last year, the worst on record in data going back to 2008.

The pivot towards cuts across Asia can be a risky gambit for emerging economies that will likely be front-running a possible Fed loosening – thus widening the interest-rate gap and potentially triggering capital outflows. However, a milder run-up in price growth and a relatively more stable banking system than in the United States and Europe could shield emerging Asian economies.

Here is a look at how those rate bets are shaping up across several emerging Asian markets:

1. South Korea

South Korean swaps are pricing in a 25-basis-point rate reduction over the 12-month horizon. The Bank of Korea pushed back against rate-cut expectations in its April 11 policy decision, citing its goal to combat inflation. However, April inflation data released at the start of May eased, providing evidence for the central bank that price pressures are easing. Faster-than-expected rate cuts from Korean policymakers may add pressure on the won, already the worst-performing currency in Asia this year.

2. Malaysia

Bank Negara Malaysia’s decision to resume policy tightening in May with a 25-basis-point increase took investors by surprise. But this might have been the final hike as ringgit swaps last week priced in as much as 25 basis points of easing over a 12-month horizon. Still, a rate reduction looks far from certain, with the March core inflation rate of 3.8 per cent significantly higher than the five-year average and a potential reduction in energy subsidies likely to add to price pressures.

3. India

The Reserve Bank of India (RBI) surprised markets by choosing to remain on hold in April after hiking in six straight previous meetings. Markets are pricing in as much as 70 basis points of rate cuts by June 2024, said ANZ senior Asia rates strategist Jennifer Kusuma in Singapore. Still, ANZ does not expect a rate cut any time soon as the RBI would want to see inflation stabilising at the midpoint of its target range before easing.

4. Indonesia

The spread between the two-year Indonesian bond yield and the policy rate has narrowed to less than 30 basis points, heralding expectations for policy easing. Back in 2019, the spread fell below that level on July 16 before Bank Indonesia started its easing cycle later in the same month.

Indonesia and the Philippines are the only countries that are forecast to see rate cuts in South-east Asia this year, said Bloomberg Asean economist Tamara Henderson.

“Indonesia has inflation under control and the rupiah has proven resilient so far to bouts of selling pressure from market volatility this year,” she said. BLOOMBERG