SINGAPORE (Reuters) - Asian central banks will tilt to less dovish postures on monetary policy as U.S. interest rates climb next year, putting pressure on domestic bond markets, said the Asia-pacific head of fixed income at State Street Global Advisors.
“Next year, I would think that with the Federal Reserve expected to raise rates, it would likely create changes in the dynamics for Asia,” Ng Kheng Siang said, speaking at the Reuters Global Investment 2018 Outlook Summit on Wednesday. “The swing of Asian central banks’ thinking is moving from neutral towards less dovish, although not exactly hawkish.”
This would put some upward pressure on yields in local bond markets.
State Street had $2.67 trillion of assets under management as of Sept. 30. The index-fund giant’s Singapore-domiciled ABF Pan Asia Bond Index Fund had total assets of $3.935 billion as of early November.
Ng’s fund is indexed to the Markit ABF pan-Asia bond index.
Although he was index neutral on his Asia positions, his views were biased to being overweight on Indonesian bonds.
“It still offers a bit of yield pickup, and the bond yield cycle hasn’t turned to the upside yet. The only thing about Indonesia is that you have to pick your levels, as it is not exactly cheap,” Ng said.
He recommends being slightly underweight on South Korea due to risks from the country’s proposed fiscal stimulus and concerns that high household debt could force the central bank to slowly normalise interest rates, suggesting bond yields have room to move up.
Ng said the Philippine peso could face some challenges because of its trade balance and concerns over domestic political issues.
But the South Korean won has potential to rise further as yields rise and Malaysia’s ringgit is vulnerable to risks around upcoming elections next year, he said.
Ng said he was surprised this year by the yuan’s sudden upward swing and rapid gains but expects it to be managed within tight ranges.
On China’s efforts to reduce the high levels of leverage and the recent rise in the 10-year government bond yield to 4 percent, he saw no sign of panic among investors to sell bonds.
“I think the Chinese authorities are trying to reduce leverage and to fine–tune,” he said. “That is causing a repricing of the bond curve, and it is not yet a reflection of any credit concerns.”
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Editing by Sam Holmes