DBS: Sell-off in emerging Asia bonds has months to run

“Asia central banks, previously dovish for growth reasons, are now turning more hawkish to focus on domestic inflation risks and financial stability risks around a faster-moving Fed,” rates strategists Duncan Tan and Eugene Leow at DBS in Singapore wrote in a research note. “We expect the strong upward momentum in Asia rates and bond yields to persist for one to two quarters.”

SINGAPORE: Asian bonds are being pummelled by a hawkish Federal Reserve (Fed) and accelerating inflation, and the sell-off is likely to last for three to six more months, according to DBS Bank Ltd.

Government securities have slid across the region this year, with South Korean bonds dropping 12%, while those in Thailand and the Philippines have slumped 6%.

The benchmark 10-year yields have climbed more than one percentage point in South Korea to 3.35%, while they have jumped over 60 basis points in Thailand to 2.57%.

“Asia central banks, previously dovish for growth reasons, are now turning more hawkish to focus on domestic inflation risks and financial stability risks around a faster-moving Fed,” rates strategists Duncan Tan and Eugene Leow at DBS in Singapore wrote in a research note. “We expect the strong upward momentum in Asia rates and bond yields to persist for one to two quarters.”

US Treasury yields should continue to climb in the coming quarters and be the main driver in pushing Asian yields higher too, the strategists said.

Peak Fed hawkishness doesn’t seem imminent and that should keep US rates rising, they wrote.

The US 10-year yields surged to 2.88% on Monday, the highest since December 2018, up from just 1.51% at the end of December.The Fed seems to be growing more hawkish by the day, with St Louis Fed President James Bullard saying Monday US interest-rate increases of 75 basis points shouldn’t be ruled out to curb inflation. — Bloomberg