Much of Asia, the continent where Hayman Capital’s Kyle Bass among other hedge fund managers who have sold major central bank policies short, is “vulnerable as risks rise,” a Credit Suisse report notes. Indeed, Asian Central Banks in several countries are at risk amid rate hikes, the report argues.
Asian central banks likely pulling back “accommodation”
“Global rate support,” a euphuism for central bank policy to suppress interest rates, is in retreat in Asia, as a “few central banks hint that accommodation could be scaled back earlier than expected.”
Pulling back the polite sounding rate “accommodation” is likely to push interest rates – and yields on government bond investments – higher across the region, Credit Suisse’s Ashish Agrawal notes in a July 3 Asia Pacific fixed income research report. Negative interest rate policy in Japan has been linked to lower profits at banks.
It isn’t the economic calendar that is driving central banks of all stripes to lighten up on the interest rate gas pedal, it is a general central bank theme that could be at play, one that might be music to the ears of Kyle Bass, George Soros and others who have bet against the over-leverage that has resulted from an easy money policy by many Asian Central Banks.
“Receding optimism on liquidity conditions could weaken China markets,” Agrawai observed, looking around the region and noticing that many regional interest rate trends might be in the early stages of incubation.
While causation varies, rates likely to increase
While the idiosyncratic points of causation may differ, Agrawai thinks there is one general constant across Asia: the low-interest rate party may be in its final hour.
The panoply across much of Asia looks relatively the same: rates are expected to rise.
In Indonesia, he expects markets could weaken on duration concerns and “on headwinds from external and domestic drivers,” as the the risk of a “mini sell-off” has risen. Korea interest rates could rise based on their correlation with US Treasuries and German Bonds while in Thailand a reversal is “underway and likely to continue,” as Bank of Thailand forward guidance – the ancient art of reading central bank tea leaves – is likely to preoccupy yield curve traders over the near term.
In India, while markets are likely to weaken further, bonds could recover and the interest rate move is not likely to “morph into a significant retracement.”
Many eyes have been on China and its deleveraging adventures. The largest regional economy currently is operating with “risks to the recent optimism on liquidity conditions” that might “trigger further weakness in markets. This move might put further expansion at risk.
