BNY’s Geoff Yu says hawkish interest rate surprises in the APAC region, including a 100 basis point hike in Sri Lanka, have failed to revive fixed income capital flows in the primary market. Sub-1 year flows remain negative while higher US interest rate expectations and import bills keep IDR, INR and North Asian currency under pressure.
Front-end flows are impoverished despite increases in the APAC region
“Sri Lanka’s central bank decision rarely attracts much attention, but yesterday’s 100 basis point increase to 8.75% (vs. expectations of 50 basis points) marks another hawkish surprise in South and Southeast Asia, a region struggling with supply pressures and currency weakness. The country has faced significant balance of payments challenges in the past, and the central bank is clearly trying to shore up cash flows without spending scarce reserves.”
“The recent string of hawkish surprises in APAC has not helped the carry trade significantly. Apart from currency pressures, fixed income inflows in APAC have not been strong. The sub-1 year portion of the curve – the segment most closely linked to liquidity preferences, as in the carry trade – has been negative on a smoothed weekly basis since early April and shows no signs of reversing.”
“Combined with major price risks for food and other imported staple goods, central banks may need to take more aggressive action to help stabilize currencies. The Bank of Japan is expected to lead the way.”
“With U.S. interest rate expectations also rising, the APAC region is likely to continue to grapple with the initial fixed income market problem: IDRs and INRs offer yield potential but are burdened by balance of payments issues. For the larger, savings-minded economies of North Asia, higher import bills are weighing on currency performance, while policymakers remain reluctant to raise rates: China’s medium-term borrowing rate has fallen to a modern low despite a clear shift towards PPI and CPI-driven inflation.”
(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)
