Dovish central banks to push Asian bond yields lower: Reuters poll

BENGALURU (Reuters) - Benchmark sovereign bond yields in China, India and Indonesia will decline over the coming year, tracking a shift in global monetary policy towards easing triggered by slowing economic growth and fading inflation expectations, a Reuters poll showed.

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie//File Photo

A turn in global monetary policy and a significant escalation in trade tensions have sparked a sharp rally in almost all Asian sovereign bonds in tandem with their global peers this year - including an inversion in the U.S. Treasury yield curve.

The yield on 10-year bonds of India and Indonesia have fallen around 50 basis points so far in 2019 while yield on China’s bonds has hardly changed.

They are all expected to fall slightly over the coming year, according to the June 21-27 poll of over 30 fixed-income strategists.

That view for lower yields is largely driven by expectations the Federal Reserve will cut interest rates in coming months. The U.S. central bank last cut rates in 2008 in response to the global financial crisis.

“We expect Asia bonds to deliver modest positive returns in the second half of this year. The change in the Fed’s stance on monetary easing has decidedly opened the door for Asian central banks to turn more accommodating,” said Jennifer Kusuma, senior Asia rates strategist at ANZ.

“A sustained inversion in the U.S. Treasury yield curve suggests ample growth pessimism in the price. However, we expect the current fragile sentiment to continue to dominate markets.”

The yield on China’s 10-year bond is expected to fall to 3.14% by the end of this year, the lowest since March. It is forecast to settle at 3.20% by the end of June next year from about 3.28% on Thursday.

China’s 10-year bond yields have hovered within a narrow range and have not dropped below 3% since 2016.

That is despite the People’s Bank of China hinting at rate cuts and other monetary policy easing steps to support subdued economic growth in the face of an escalating trade war with the United States.

While China has not cut interest rates since 2015, it has taken other easing measures, including lowering the amount of money banks must park as reserves.

“The 10-year China government bond yields have resumed their downtrend following the escalation of trade tensions. As investors seek assets of longer duration and lower risk, we expect the downtrend to continue and liquidity conditions to remain accommodative,” said ANZ’s Kusuma.

All but two of 24 respondents who answered an additional question said risks to their forecasts for China and India’s 10-year bond yields were skewed more to the downside.

Strategists forecast the yield on India’s benchmark bond to decline to 6.85% in a year, from about 6.90% on Thursday.

India’s 10-year bond yields plunged about 40 basis points in May, the sharpest monthly fall since November 2016, largely due to increased foreign investments after Prime Minister Narendra Modi’s strong victory in the general election.

Below-target inflation in the near-term and a slowing economy have fueled expectations the Reserve Bank of India will cut rates again soon.

“With a relative hawk (RBI Deputy Governor Viral Acharya) stepping down, the monetary policy panel is likely to turn more dovish. This reinforces our call for another 50 basis points cut in the rest of fiscal year 2020,” said Eugene Leow, rates strategist at DBS.

“We continue to expect the 10-year yields to be biased for further downside.”

Indonesia’s 10-year bond yields are forecast to fall to 7.25% in a year’s time from about 7.42% on Thursday, mostly because Bank Indonesia is forecast to cut interest rates next quarter, joining central banks in India, Malaysia and the Philippines who have already acted.

“We expect Bank Indonesia will cut interest rates. It will cause bond yields to go down for the rest of the year and early next year,” said Ariawan, head of fixed income research at BNI Sekuritas.

Additional reporting by Anisha Sheth; Polling by Khushboo Mittal; Editing by Jonathan Cable & Shri Navaratnam