Asia Rates: Undervalued but watch US rates

Asia govvies are undervalued but watch timing and economic nuances.
Eugene Leow08 Sep 2021
    Photo credit: Unsplash Photo

    Asia government bonds look deeply undervalued compared to US Treasuries. This phenomenon has been in place since the Pandemic hit last year. Investor demand for safety in this environment manifests in the form of high Asia yields relative to US yields after accounting for standardized funding and inflation data as captured by our Asia Rates Valuation Indicator (ARVI). Our ARVI flags KTB as the most undervalued amongst the EM govvies we track. Domestically, KTB face headwinds from a relative hawkish Bank of Korea, which hiked rates by 25bps in August. While the COVID-19 is a challenge, further hikes in the coming quarters look inevitable if the BoK is intent on normalizing policy settings. The market has priced in another 2.5 hikes over the coming year. We do not see much scope to load even more hikes into the front of the curve.


    China government bonds remain one of our favourites. Having normalized monetary policy in mid-2020, CGB yields are much closer to pre-pandemic levels compared to peers. The recent RRR easing did drive 10Y yields below 2.9%, but expectations for further downside should be tempered. We do not expect an aggressive easing cycle from the People’s Bank of China (PBoC) and view policy changes as tweaks to manage the slowdown in the economy. Broadly, we see neutral 10Y yields to be in the 2.8-3.2% range.  


    The high yielders (Indonesia and India government bonds) have performed well in recent weeks. Part of this outperformance could be due to Fed Chair Powell managing to pull off taper communication without causing tantrums. Importantly, both economies appear to have clearly crested their respective COVID-19 wave, setting up for a period of economic recovery ahead. We turned bullish IndoGB recently (see here) but are a tad more cautious on India rates (see here).


    The upshot is that EM/Asia govvies still look undervalued. However, there are timing and economic nuances that bear watching. With US yields normalizing higher (and putting a bid on the USD), this development could pose short-term headwinds to EM rates in general. Once this hurdle gets overcome, it would be a clearer signal for Asia govvie outperformance. 


    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.
    The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.