By Jongwoo Cheon and Masayuki Kitano
SINGAPORE (Reuters) – Reduced expectations for a U.S. interest rate rise this summer lifted Asia’s high-yielding bond markets on Monday, but investor concerns over capital outflows and the fate of regional currencies could pose major hurdles to a more meaningful rally.
Some Asian central banks could take advantage of the Federal Reserve staying on hold to keep their own monetary policy loose, which would boost sentiment for the region’s assets including bonds.
Ten-year yields from Malaysia to Indonesia fell as bond prices rose after weaker-than-expected U.S. jobs data on Friday prompted investors to rule out the chance of a Fed rate rise this month and to trim expectations for an increase in July.
Yet, the bond rally was modest and investors were also reluctant to sell the dollar aggressively against emerging Asian currencies or to buy Asian stocks.
“It could be a short-term move,” said Edward Ng, fixed income portfolio manager for Nikko Asset Management in Singapore, referring to the rise in bond prices.
“The expected direction for the Fed is still towards a hike and this should be repriced back in once improvements in U.S. data are seen again.”
Investors now await further guidance on the outlook from Fed chief Janet Yellen, due to speak on economic outlook and monetary policy at 1630 GMT.
The possibility that the Bank of Korea cuts its 1.5 percent policy rate when it meets later this week has risen, said Shin Dong-su, a fixed-income analyst at Eugene Investment & Securities in Seoul.
“But the Fed has not given up a rate hike yet,” Shin said. “Who will invest here when the U.S. dollar is strong and interest rates are same?”
South Korea’s central bank has held rates steady since last June despite falling inflation, in part due to concerns about capital outflows and the country’s massive household debt.
If, as markets fear, the downturn in U.S. jobs is a blip that does not deter the Fed from raising rates, it could lead to capital outflows from the region. Currencies would weaken against the dollar, undermining their bond and stock investments.
Concerns over China’s weakening economy add to the dilemma of whether to buy bonds.
Analysts at Citi in a research note recommend being bullish emerging Asian markets because expectations for Fed rate rises might be adjusted lower again, but propose buying bonds rather than currencies because of the uncertainties.
Asian stock markets were up 1 percent on Monday, extending a two-week rally. Indonesia’s rupiah and Malaysia’s ringgit rose more than 1 percent each against the dollar earlier but have been losing ground since early March.
Bond yields in Indonesia, among Asia’s highest, fell with the 10-year yield touching a low of 7.626 percent, the lowest since May 18. Bank Indonesia has cut rates three times this year.
Foreigners hold about 38 percent of outstanding Indonesian government bonds, subjecting the rupiah to more volatility. It was hit by the Fed-inspired 2013 ‘taper tantrum’ and early this year after the Fed’s first rate rise in a decade.
India’s central bank reviews rates on Tuesday. Expectations are for its policy rates to be kept on hold after the central bank embarked on measures to ensure the banking system has adequate funding and its policy transmission is more efficient.
“The Fed concerns have been there in various forms for a long time now, starting with the taper tantrum,” a senior Indian policymaker familiar with the Reserve Bank of India’s thinking told Reuters last week. The RBI gives 80 percent weighting to domestic factors and 20 percent weighting for global factors when it reviews policy, he said.
“So, in that sense, there hasn’t been any sudden rise in weight to external factors.”
Ultimately for bond markets, it would be a question of how far Asia’s easier monetary policies or lower rates infuse volatility and weakness in regional currencies.
(Additional reporting by Christine Kim in Seoul, Gayatri Suroyo in Jakarta and Suvashree Dey Choudhury in Mumbai; Editing by Jacqueline Wong)