Asian bond investors are preparing for a change in US interest rates. Since speculation suggests that the Federal Reserve could be announcing an increase later this year, Investors and experts are concerned that a hike in rates could repeat the situation of 2013 whereby Asian bond markets “sold off” after the Fed first showed signals of curtailing its bond-buying program. Others believe that the Asian markets are now much stronger and not so influenced by foreign market fluctuations.
Will there be a repeat of 2013?
After China and India, it is the US bond yield that impacts fixed income markets across Asia. Experts warn that similar to 2013 Asia may again be exposed due to high levels of foreign investment in local currency bonds. There are views that such levels of US investment could be a major reason for disturbance in Asia if an interest rate hike were to occur. The Asian bonds market may now be a greater risk particularly with high levels of foreign ownership specifically in Malaysia and Indonesia.
Is the hype overstated?
There are many who feel the change in rates is being over hyped. Such a beliefs are centered around the following reasoning:
International investors have cut their position in the Asian bond market following the 2013 crisis, and the markets are now in a better position to face any further crisis
Policy makers in Asia are already working to strengthen their economies by reducing subsidies and raising the taxation
Sovereign bonds in many of the developed markets are yielding close to or below zero, there is a good possibility that a hike in the US rates will not trigger heavy Asian outflows
Asian bond markets have a rich base of local investors diluting the impact of foreign investor actions
Local policy rates recently have a growing impact on Asian fixed income compared to the global rates.
Nothing is certain
For now, it can not yet be fully determined if the rate hike in the US will affect the Asian financial markets. Along with the risk, “nervousness” arising from the expected actions that the Fed would take, can not be ruled out, as investors are concerned with the possible after-effects.
Many believe there is a risk of increased volatility as and when the Fed begin increasing the rates, however the Asian bond markets should be manageable provided the Fed take the process gradually.
There is of course the probability that the US decides to delay the expected rate hike. Recent data raises questions as to whether or not the US economy is gaining despite the historic highs in US share prices. For the fifth straight month in April, the U.S. industrial production fell unexpectedly along with a drop in the consumer confidence to a seven-month low. This data combined with the recent weak retail sales and the producer inflation data raises doubts as to whether the US economy is actually gaining momentum. Such a lacklustre growth in the US increases the odds that the Feds may delay raising interest rates.
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If you would like to know more about how the US interest rates will affect Asian funds then please contact one of our advisers at Gladstone Morgan, who will be happy to discuss it in more detail with you.
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