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Emerging Markets in Asia are Escaping From Yield Curve Inversion

Southeast Asia’s sovereign bonds can continue to outperform their emerging-market peers in maturities out to three years, thanks to lower inflation and steep yield curves that contrast with flattening seen in other regions.

Benchmark interest rates that are still at record lows have kept yield curves between around 1 and 2 standard deviations above the five-year mean in Indonesia, Thailand, the Philippines and Malaysia, according to a Bloomberg analysis of 10 markets.

By comparison, yield curves are more than 2 standard deviations below the five-year average in many key markets across Latin America and Central and Eastern Europe, the analysis shows.

While Southeast Asia isn’t immune from inflationary pressures that can erode returns on short-dated bonds, strategists see the region’s central banks as facing less pressure to react as rapidly as peers elsewhere with rate hikes.

Rising energy costs are likely to be more acute in Europe, while Malaysia benefits as an oil exporter and Indonesia taps into the commodity rally as a supplier of everything from tin to palm oil.

Rice’s position as a staple in Asia also mitigates the impact of soaring wheat prices on food costs.

“Economies in the region were able to maximize export production through much of the past two years,” said Sue Trinh, head of macro strategy for Asia at Manulife Investment Management in Hong Kong, citing the importance of trade surpluses.

“At the same time, the surge in pent-up demand in Asia after the reopening wasn’t as strong relative to other regions, particularly when compared with other EM economies,” she said.

Policy makers have hiked benchmark rates above pre-pandemic levels in Poland, Hungary, the Czech Republic, Brazil and Chile.

By contrast in Thailand, where inflation last month accelerated to the fastest pace since 2008, the central bank may hold off raising rates until the first quarter of next year, according to the median of estimates compiled by Bloomberg.

“Southeast Asia is likely to be less vulnerable to inflation initially, suggesting that local debt could outperform, while bond curves elsewhere could invert as central banks try to get ahead of inflation risks,” said Jon Harrison, managing director for emerging-market macro strategy at TS Lombard in London.

The spread between the 2- and 10-year Polish governments bonds turned negative in March, as shorter yields rose above longer ones. A similar inversion has taken place in the Czech and Brazilian bond yield curves.

Bonds from Malaysia and Indonesia offered returns of 0.3% and -0.9% since the escalation of Russian actions against Ukraine, putting them among the top-five performers from 19 major emerging markets in a Bloomberg gauge of local currency government bonds.

The index registered losses of 3.4% from the close of Feb 18 to March 9.

Source: Bloomberg

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