Indonesian Bond Yields Slide As investors Buy Growth-Sensitive Assets
Case in point is Indonesia, whose 10-year bond yield plummeted to a 2018 low last month as investors snapped up higher-yielding and growth-sensitive assets. The rupiah is also Asia’s best-performing currency over the past month, rallying more than 3.6% against the dollar.
Most Asian currencies are also likely to “face a limited impact or even strengthen against the dollar,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore. “Higher U.S. yields could be a reflection of stronger U.S. economic prospects, which would be beneficial to Asian economies, but would be less supportive of the dollar.”
Gold Hold
The outlook is a little less certain for gold.
If a rise in Treasury yields to 1% or higher “is due to a reflation trade, then inflation breakevens — gold and gold miners, commodities, will do well usually,” according to Societe Generale SA strategist Sophie Huynh.
Gold has tended to move inversely to yields thanks to the haven trade
But further gains in yields might also hurt the yellow metal as demand for haven assets wane, according to Ken Peng, head of Asia investment strategy at Citigroup Inc.’s private-banking arm.
“Say we go to 1.5% on the 10-year yield, then you’re likely to see gold below $1,800, closer to $1,700,” Peng said. Gold gained a second day to trade just above $1,820 an ounce on Wednesday.
Credit Bonanza
Like equities, the credit market may also stand to gain from higher Treasury yields.
Debt investors have been clamoring for longer-term U.S. corporate bonds as stimulus spending bolsters risk appetite, sending spreads on notes maturing in 10-years or more to their tightest since February.
Credit spreads should remain tight as long as the move higher in Treasury yields is due to a reflation trade, SocGen’s Huynh said.
Dollar Hit
Higher Treasury yields could end up weighing on the world’s reserve currency.
Should the U.S. yield curve steepen as inflation expectations rise, “this will incentivize investors to currency hedge,” Citigroup Inc. strategists including Calvin Tse wrote in a recent note. Moves by investors to shield from currency fluctuations in U.S. investments could see the dollar fall by as much as 20% next year, they said.
Goldman Sachs Asset Management’s James Ashley, who also sees potential for more curve steepening, is forecasting a weaker dollar against emerging currencies such as China’s yuan.
Fed Reaction
Still, much will depend on the response of the Federal Reserve to any spike in U.S. yields, particularly amid the ongoing debate on its asset purchase program and expectations it will let the economy run hot.
The Fed is currently buying about $120 billion in Treasuries and mortgage-backed bonds every month, partly aimed at lowering borrowing costs for businesses and households.
Longer-term bets around Treasuries and their ripple effects on other asset classes may hinge on “how the Fed communicates,” said Citi’s Peng. “There’s a huge amount of inertia in terms of positioning that’s prevented higher yields — that’s fine when we’re in a recession, but not when we’re in proper recovery mode.”
—With assistance from Liz Capo McCormick and Jill Ward.
This article was provided by Bloomberg News.