Southeast Asia’s longer-dated bonds have been the winning trade as the region’s yield curve flattened, and there are signs to suggest that the bet will remain profitable.
Hopes of a US policy pivot may provide a tailwind to long-end notes while shorter maturities are buffeted by expectations that regional interest rates will remain high. The gap between Indonesia’s two- and 10-year yields is at a multi-year low while the spreads for Malaysia and Thailand have also narrowed.
Global notes have bounced back after nursing a three-month loss as traders double down on wagers that the Federal Reserve may start to cut interest rates next year. Recent data suggest US inflation and the jobs market are cooling, prompting investors to debate whether it’s time to start buying bonds again.
The recent flattening in the region “has been triggered by the Treasury rally on hopes of a peak in the Fed cycle, which has also led to the unwinding of bearish positions on duration,” said Abhay Gupta, strategist at Bank of America in Singapore. Issuance in markets such as Malaysia and Indonesia also tends to drop toward the year-end, which may accentuate curve flattening moves, he added.
The flattening move is expected to extend this quarter as longer-dated yields continue to fall on easing price pressures. Thailand posted its first deflationary print in almost two years last month, while Indonesian inflation has fallen back within the central bank’s 2%-4% target. In Malaysia, consumer prices rose at the slowest pace since March 2021 in September.
This means policymakers are likely to refrain from further rate increases. The majority of analysts in a Bloomberg survey see Bank Indonesia standing pat at a review on Thursday while Bloomberg Economics expects Bank of Thailand to hold fire at a Nov. 29 meeting.
Emerging Asian central banks will likely signal a hawkish pause in the near term as policymakers may be reluctant to send dovish signals before the Fed does as this will be a drag on their currencies.
There are also other local factors that will help to support a further flattening in the region’s yield curves.
In Malaysia, short-end yields may remain elevated as financial conditions tighten, with the three-month interbank rate rising to a nine-month high. Longer-dated yields in Thailand have come off their recent highs on bets that the government will scale back its $14 billion cash handout program.
