Take Indonesia, where the difference between yields on two-year and 10-year securities is the widest in almost a decade, the starkest indication in the region that markets have been pricing in the longer-term ramifications of a surge in government spending.
The trend is similar in Thailand and Malaysia.
Here’s a look at how yield curves are moving in the four major Southeast Asia bond markets:
Indonesia
The nation’s yield curve has been steepening as two-year rates have been driven lower by Bank Indonesia’s interest-rate cuts.
A similar decline in longer maturities has been prevented by concern about the outsized budget deficit and possible rupiah depreciation pressures resulting from central bank bond purchases.
Policymakers have lowered their benchmark seven-day reverse repo rate by 50 basis points (bps) during the past two months to help prop up faltering growth.
Borrowing costs in local money markets have fallen even more, with the overnight index average rate dropping a full percentage point since May, further boosting domestic demand for shorter-maturity bonds.
Longer-dated yields have remained relatively sticky as the central bank has widened its forecast for this year’s fiscal deficit to 6.34% of gross domestic product.
Global funds have also turned sellers of the nation’s debt, with net outflows of US$291 million in August halting four months of inflows.
There may be a continued bias toward rupiah weakness until the extent and permanence of Bank Indonesia’s debt monetisation is made clear, according to Bloomberg Intelligence.
Malaysia
The difference between Malaysia’s three- and 10-year yields has been widening as traders have boosted bets on a rate cut at the central bank’s September meeting, which would be a fifth straight reduction.
The spread is now around 65 bps, having more than doubled since the end of last year.
As is the case in Indonesia, concern about the budget shortfall is plaguing longer tenors. The government raised its projection for the fiscal deficit to 5.8% to 6% in June, from 4.7% to 5%, citing the need for additional stimulus.
Investors appear to be shying away from longer-maturity bonds in favour of short-term ones.
The bid-to-cover ratio at a 20-year auction last week dropped to 1.5 times, the lowest this year, while that at a three-year sale last month climbed to a 2020-high of 2.51 times.
Thailand
Thailand’s two-to-10-year yield spread is close to an 18-month high, although it may be getting near the end of its steepening journey.
An auction of 2049 government bonds last week drew a bid-to-cover ratio of 2.2 times, holding close to this year’s average of 2.35 times.
Downward pressure on two-year yields also appears to be dwindling, with swap markets indicating the central bank will stay on hold for the rest of the year.
Nonetheless, there are some reasons that suggest steepening may resume. The correlation between longer-tenor Thai government bonds and their US equivalents is the highest in the region, signalling any spike higher in Treasury yields may spill over into a similar move in Thailand.
Philippines
There’s an exception to every rule. The Philippine yield curve has remained relatively unchanged so far in 2020 despite the government saying its budget deficit will exceed 7% from this year until 2022, a record high.
One of the reasons may be the central bank’s purchases of 800 billion pesos (US$16.4 billion) of government debt since the outbreak of the coronavirus pandemic, or an estimated 45% of the country’s domestic borrowings over the period.
With the central bank seemingly intent to hold off from further rate cuts, the curve may even have room to flatten.
What to watch
- Thailand will release customs trade data on Monday, after exports slumped by 23% in June, the biggest decline in a decade.
- Malaysia will publish trade numbers on Friday.
- Indonesia will be conducting a conventional bond auction on Tuesday, with the previous sale on Aug 11 seeing the best bids since February.
- The Philippines is scheduled to auction 30 billion pesos of 20-year bonds on Tuesday.