DBS: Asia Rates: Wary Of U.S. Short-Rate Volatility

DBS note that “markets are now pricing for 70% chance of 50bps (30% chance of 25bps) at the March FOMC meeting and 50% chance of 50bps (50% chance of 25bps) at the May meeting. As we get more key U.S. data in the coming days, we think that the pricing for May meeting is likely to move together with the nearer March meeting. I.e. If markets price for higher likelihood of 50bps in March, they will also price for higher likelihood of 50bps in May. The rationale is that the alternative scenario where Fed reaccelerates to 50bps in March, and subsequently, downshifts again to 25bps in May would be a tough sell and could unnerve markets.”

• “For Asia local currency rates and bonds, the near-term macro environment is unfavourable. U.S. Fed is clearly quite data-dependent and Fed expectations are expected to swing around with the data. Resulting U.S. short-rate volatility tends to lead to poor outcomes for Asia local currency. We think that bonds of Asia low-yielders such as Korea and Thailand could be more vulnerable because of their lower carry buffers, while high-yielders like Indonesia and India would be more resilient. We continue to hold a receive swaps bias across Asia ex China because most Asia central banks are very close to their end of their hike cycles. But in the current context of significant Fed uncertainty, any receive Asia swaps positions should be paired with some pay U.S. swap hedges.”