We believe that most Asian central banks have come towards the end of their easing cycles, with the exception of India. We now look towards local demand/supply factors to gauge market direction for 2013.
SUPPLY OUTLOOK MIXED
Net government bond supply as a percentage of the total outstanding is slightly higher versus 2012 in mainland China, Taiwan, Singapore and Malaysia, but is expected to be more moderate in Indonesia, India, Thailand, the Philippines and South Korea. The Philippines has raised more than it needed and is able to reduce its financing needs.
The Monetary Authority of Singapore sets supply according to demand by surveying primary dealers, so demand always slightly exceeds supply. Malaysia is keeping issuance of Malaysian government securities light as it shifts to more government Islamic issues (GIIs) and offers guarantees on other debt.
South Korea’s net supply is similar to last year, while the Ministry of Strategy and Finance will reduce five-year issuance and increase 30-year issuance.
REAL-MONEY DEMAND UP
Foreign demand for Asian bonds from global real-money funds was relatively subdued last year, as US-dollar-Asian ex-Japan (AXJ) foreign exchange was range-bound in the first half and Asian bond yields were low compared with Central Europe, the Middle East and Africa (CEMEA) and Latin America. CEMEA markets embarked on easing cycles last year, providing the impetus for bond rallies.
However, feedback from our recent trip to Europe was that CEMEA bonds are no longer looking as attractive. The focus of global real-money funds may shift back to Asia. We are bullish on AXJ currencies, particularly the South Korean won, Philippine peso, Malaysian ringgit, Indian rupee and baht.
Expected FX gains in these markets will support bond inflows from total-return investors despite the fact that duration gains will be limited. The diversification from sovereign investors into Asia should continue.
Bank demand for bonds has been moderate for most markets amid low yields and strong loan growth. Insurance demand for bonds was fairly stable last year, although Indonesia is introducing a risk-based capital framework this year, which should raise insurance companies’ concern over asset/liability duration gaps.
Pension-fund assets under management continue to grow, but several funds are looking for higher yields, with Malaysian funds moving into GIIs and Korean funds moving more into equities. Pension-fund demand in Asia should remain stable.
However, we expect to see strong demand from pension funds and insurance firms for 10-year baht bonds at 3.80 per cent. Despite investors’ concerns about the Bank of Thailand turning less dovish, we see 3.80 per cent on the 10-year bond (LB236A) as a strong resistance level. We are bullish on the long end of the Thai bond market and we expect strong local demand to outweigh concerns about a less dovish Bank of Thailand.
Danny Suwanapruti is a senior rates strategist for Standard Chartered Bank in Singapore.