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Coronavirus Rate Cuts To Tug Most Asian Bond Yields Even Lower

Stock markets have also plummeted amid fears the global lockdown to contain the virus has tipped the world economy into a recession from which it will take year to recover.

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Yields on sovereign bonds across most major Asian economies will fall further over the coming year, after already being yanked down following emergency interest rate cuts by central banks to counter the coronavirus hit, a Reuters poll forecast.

Stock markets have also plummeted amid fears the global lockdown to contain the virus has tipped the world economy into a recession from which it will take year to recover.

While central bank rate cuts pushed yields on most major Asian bonds to historic lows earlier this month, over the past week traders have dumped sovereign debt for cash, driving a surge in the other direction.

However, nearly two-thirds of the 12 fixed income strategists polled by Reuters between March 17-24 who answered an additional question said that trend was unlikely to continue much longer, as the recent rise in yields was just a knee-jerk reaction to the massive amount of fiscal stimulus dead ahead.

"In Asia, the stress has been significant...we are probably in the acute phase of the global assets sell-off. A considerable premium has been embedded into Asia rates and it will be eroded once the fear on COVID-19 eases," said Eugene Leow, rates strategist at DBS in Singapore.

"I see yields on Asian bonds skewed to the downside over the coming three to six months."

Indonesia 10-year bond yields were forecast to take the biggest hit, falling about 160 basis points to 6.76% in a year's time according to the median forecast, from about 8.32% on Tuesday.

The already modest outlook for China, India, South Korea, Indonesia, Thailand, Malaysia and Singapore was downgraded from a poll taken three months ago.

"With the hit to global private demand, the environment is likely to be very deflationary," said Freya Beamish, chief Asia economist at Pantheon in London.

"With this kind of massive real economic shock, the recovery is likely to be very disappointing in these regions and that is going to exert downward pressure on yields."

However, some respondents said the fundamental relationship between interest rates and yields has broken as desperate traders are dumping government bonds and hoarding cash.

"Asia bonds markets are in a sort of paralysis as more and more unconventional policies are being unleashed. On the one hand monetary accommodation should lower bond yields, but on the other hand fiscal expansion could steepen the yield curve," said Jennifer Kusuma, senior Asia rates strategist at ANZ in Singapore.

"In Asia, we still have monetary policy space and we are not going to see the kind of fiscal stimulus we see in developed markets. In this scenario, the yield curve should steepen, but we are very early in the process and don't know what we will see as we get out of this situation."

GROWTH FORECASTS CHOPPED

A separate poll predicted growth in China, the region's economic powerhouse, would tumble to 3.5% in the first quarter year-on-year from the previous quarter's of 6.0%. Some say it may have even shrunk on a quarterly basis.

Since then, many economists have chopped their forecasts further to show either no growth or even a contraction in the current quarter.

To cushion the economic blow from the coronavirus outbreak, the People's Bank of China (PBOC) cut the cash that banks must hold as reserves for the second time this year and lowered the one-year loan prime rate (LPR), the new benchmark lending gauge introduced in August, to 4.05%.

But China's easing measures have been modest compared with those taken by other major world central banks.

Economists and fixed income strategists expect more support from the PBOC over the coming months to get the economy back on a steadier footing.

Expectations for further easing led strategists to cut predictions for China's 10-year bond yield, which is now forecast to fall to 2.63% by end June, compared with 3.15% expected in the Dec. 19 poll.

It is then forecast to rise slightly to 2.70% by the end of March next year, around where it was trading on Tuesday.

"We expect China government bond yields will face limited upside in Q2. The PBOC will likely maintain an easing bias to help growth counter-cyclically," wrote Zhaopeng Xing, China markets economist at ANZ in Shanghai.

"However, it will not derail the downtrend in economic growth and the probability of a V-shaped rebound is low. The rates market will consequently have less room to rally. We expect the 10-year yield to average at 2.7% this year."

(Reuters)


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