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Asia bond markets show signs of angst as fiscal talk swirls

[SINGAPORE] First it was India and South Korea. Now Japan and New Zealand are joining Asia Pacific's fiscal stimulus bandwagon raising concerns for bond investors who will be asked to fund the attempt to re-ignite growth.

Weekend reports of a US$91 billion economic stimulus proposal in Japan and plans to fast-track infrastructure spending in New Zealand helped extend a rise in bond yields in Tokyo and Wellington sparked by positive manufacturing data from China. Market participants spoke of concerns over policymakers' growing appetite to loosen their countries' purse-strings.

"With monetary policy close to the limits for several major central banks, fiscal stimulus will be brought into play," said Eugene Leow, fixed-income strategist in DBS Bank in Singapore. "There is an increasing sense that overly low rates and overly flat curves are negative for the economy."

The yield on benchmark Japanese government bonds rose 2 basis points to minus 0.06 per cent Monday while its New Zealand equivalent was up 6 basis points to 1.35 per cent. The Bank of Japan introduced negative rates in 2016 - now minus 0.1 per cent on a portion of commercial bank reserves - while the Reserve Bank of New Zealand slashed borrowing costs to a record low 1 per cent this year.

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As global central banks edge ever closer to the limits of their monetary firepower, governments are increasingly stepping up to act. India pledged US$1.44 trillion in infrastructure investments earlier this year, while South Korea may sell a record 130.6 trillion won (S$151.12 billion) of bonds next year as part of its most expansionary budget since the financial crisis.

"Asean economies have been at the fiscal side for a while now but it does look to be gathering pace," said Vishnu Varathan, head of economics and strategy at Mizuho Bank. "It's a reminder that bond market trades are not going to be one-dimensional as governments potentially step up."

Still, some strategists suggest it may be too soon for bond investors to worry about an onslaught of extra government spending.

"Governments may be happy to let central bankers exhaust their options before significantly loosening the budget," said HSBC Holdings Plc strategist Tom Nash. "In the meantime fiscal expectations are prone to disappointment."