Sovereign bond yields across most major emerging Asian economies will slip in the months ahead as all central banks across the region are expected to cut interest rates further to nurse their economies back to health, a Reuters poll showed.
A sharp slowdown in these export-reliant economies as the U.S.-China trade war worsened has pushed policymakers to either trim rates significantly or signal more easing soon.
That has led to increased demand for low-risk government debt in the region, pushing yield curves to invert in Singapore, Thailand and Hong Kong – meaning short-term yields are higher than long-term rates – which many experts in developed markets consider an indicator of an impending recession.
“Countries which are heavily dependent on exports are all suffering from the trade war…I see growth concerns getting more prominent in driving policy easing,” said Prakash Sakpal, Asia economist at ING.
“The tariff war provides no hopes of a near-term trade deal, supporting the positive sentiment towards Asian bonds.”
China’s 10-year note yield has declined more than 10 basis points, while in Singapore, South Korea, India, Indonesia, Thailand and Malaysia yields have fallen 30-90 basis points this year so far.
The Philippines 10-year government bond yield has slumped as much as 230 basis points.
The overall lower trend is unlikely to change over the coming year, with yields for benchmark bonds of those countries, barring Thailand, predicted to fall further, according to the Sept. 19-27 poll of more than 40 fixed-income strategists and economists.
The already modest outlook for China, India and Indonesia was downgraded from a poll taken three months ago.
Growth in China, the region’s economic powerhouse, is expected to slow to 6.2% this year and 6.0% next, after averaging double-digit growth since 1978, when Mao Zedong’s rule ended, according to economists in a separate Reuters poll.
That is despite the People’s Bank of China (PBoC) cutting its reserve ratio requirement three times this year and its one-year loan prime rate on Sept. 20.
Expectations for further easing led strategists to cut predictions for China’s 10-year bond yields, which is now forecast to fall to 3.0% by the end of this year, its lowest since December 2016.
It is forecast at 2.94% in a year.
“The downside risks to growth will be constructive for China government bonds. As we expect a policy rate cut in the next quarter, the hurdles for a further decline in CGB yields will have been removed,” wrote Richard Yetsenga, chief economist at ANZ.
“We expect the downtrend bias in the 10-year CGB yield to continue into 2020.”
Other Asian economies are also highly exposed to a trade slowdown, as since the Asian crisis more than two decades ago policymakers have pursued export-oriented strategies. Any resilience to external shocks hinges on robust domestic demand.
The latest consensus showed government bond yields in India, South Korea, Indonesia, Malaysia, Philippines and Singapore will fall between 10 and 40 basis points over the coming year.
If those predictions are realized, it will increase worries among policymakers where yield curves have already inverted.
Nearly two-thirds of respondents to an additional question agreed and said the recent yield curve inversion in those economies suggested a significant growth slowdown or a recession.
“Recession is knocking at the doors of Singapore, Thailand and Hong Kong and the recent inversion is probably signalling the right thing,” said ING’s Sakpal.
Most major Asian central banks are predicted to ease further to boost growth, including the Reserve Bank of India (RBI) which has been one of the most aggressive, cutting interest rates by 110 basis points.
However, the low transmission pace of those RBI rate cuts has not helped Asia’s third-largest economy – while its regional peers face similar hurdles.
“The impact of monetary policy is diminishing more broadly than just across the core of Asia,” added ANZ’s Yetsenga.
“The limited effectiveness of policy in Japan and the EU is self-evident. But, even in the U.S. with still 200 basis points between the fed funds rate and zero, policy is not packing the same punch.”