Emerging Asian bonds gain appeal as US tariffs cool inflation
Focusing more on local production could contain inflationary pressures. That also comes at a time when the region's long-dated yields — adjusted for inflation — are above historical averages, according to data compiled by Bloomberg. Attractive valuations and subdued inflation are likely to boost the appeal of Asian fixed income.
'Higher US tariffs will weaken export demand in EM Asia, leading to a shift in production for local markets instead, as the increase in the domestic supply of goods will keep local inflation in check,' according to Yifei Ding, a portfolio manager at Invesco Hong Kong Ltd. 'This will make EM Asia bonds more attractive' for domestic fixed-income investors.
Easing domestic inflation may be a silver lining amid the whiplash of on-again, off-again US tariffs, as regional governments scramble to close trade deals with the US to protect their export-dependent economies. The outlook for domestic inflation will also depend on whether officials increase fiscal stimulus — and on the dollar's trajectory.
At this point, regional price pressures remain manageable. They're within the price targets for Bank Indonesia and Reserve Bank of India, and below target for the Bank of Thailand, Bangko Sentral ng Pilipinas and the People's Bank of China.
Inflation readings within the target ranges have fueled expectations that central banks across the region may either cut interest rates or maintain them. Several rate cuts this year in the region have helped pulled down nominal yields.
However, debt from those countries is more appealing than usual. The Philippines 10-year yield, adjusted for the most recent inflation print, is 2.1 standard deviations above the five-year average. The same gauge for India is at 2.5, and Malaysia, Thailand and South Korea are around 0.60.
'EM Asia inflation being very subdued keeps valuations on a real basis attractive' in government bonds, said Rohit Garg, head of foreign-exchange and rates strategy Asia ex-Japan for Citigroup Inc. –BLOOMBERG
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