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Monday, January 30, 2023
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Bond investors bet on Southeast Asia rate hikes

Bond investors

Interest-rate swaps in Thailand and Malaysia hit a two-year high this week as traders bet that rising inflation will lead to quicker-than-expected rate hikes

Bond investors lulled into the belief that inflation will remain muted in Southeast Asia are about to get a wake-up call.

Interest-rate swaps in Thailand and Malaysia hit a two-year high this week as traders bet that rising inflation will lead to quicker-than-expected rate hikes.

That could mark the end of the region’s status as a mini-haven from the selloff that has engulfed global markets as a majority of central banks turn hawkish. And if Southeast Asia’s policy makers don’t act, then real bond yields will get eroded further.

With elevated oil and upside risks to food prices, inflation in the region will likely pick up into the latter part of the year and overtake the U.S., said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. That’s going to narrow real-rate spreads relative to Treasuries, spurring outflows, he said.

The canary in the coal mine may well be Thailand, where the central bank is regarded as the most dovish in the region. Inflation quickened to 3.23% in January, beating economists’ estimates for a gain of 2.47%. That sent two-year non-deliverable interest rate swaps surging by as much as 22 basis points since the data release on Friday.

Malaysia’s central bank chief said cost pressures will continue to emanate from high commodity prices and supply-chain factors after unveiling better-than-expected fourth-quarter growth data on Friday. Price pressures in countries including Indonesia and Malaysia have started to climb, with the latter hovering above the 3% mark. As a result, inflation-adjusted yields have dipped below historical averages.

The Thai 10-year benchmark bond is offering a real yield of minus 103 basis points, or 1.8 standard deviations below the three-year average. The equivalent Indonesia and Malaysia notes are seeing inflation-adjusted yields close to one standard deviation below the mean.


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