Asia's highest-yield bonds slide after Fed's hawkish signal

Mumbai/Riyadh

INDIAN and Indonesian bonds fell as investors trimmed bets on aggressive interest-rate cuts in high-yield markets after a hawkish signal from the Federal Reserve.

The securities dropped after Fed Chairman Jerome Powell said Wednesday's monetary easing was "not the beginning of a long series of rate cuts", taking some of the pressure off Asian central banks to follow suit.

"If EM Asian currencies continue to weaken significantly against the dollar, that may make EM Asian central banks more cautious about cutting their policy rate too aggressively," said Edward Ng, a portfolio manager at Nikko Asset Management in Singapore.

The yield on Indonesia's benchmark 10-year bonds jumped nine basis points to 7.46 per cent, while that on similar-maturity Indian debt climbed four basis points to 6.41 per cent.

The Reserve Bank of India has already cut rates by a combined 75 basis points this year in one of the most aggressive easings in Asia. Indonesia's central bank reduced its benchmark rate last month for the first time in almost two years.

Some caution may be warranted in reading too much into Thursday's bond sell-off, said Eugene Leow, a fixed-income strategist at DBS Bank in Singapore.

The rise in Indonesian yields may be a knee-jerk reaction, he said. "When the re-pricing of Fed expectations is done, investors will gravitate back again."

More than four years after the oil-price crash, Gulf Arab policy makers can finally count on support from the Federal Reserve to add fuel to their fragile economic recovery.

Central banks in Saudi Arabia, the United Arab Emirates, Qatar and Bahrain cut their benchmark interest rates by 25 basis points following a similar decision by the Fed on Wednesday. Kuwait kept its discount rate unchanged at 3 per cent.

Gulf central banks largely move in lockstep with the US to protect their currencies' peg to the dollar. But as the Fed raised rates nine times since 2015, they were unable to lower borrowing costs to help weather the effect of lower oil prices on their economies.

"Monetary easing, although small, is timely and will give the region's economies a helpful boost as growth has yet to recover from the 2014 oil price decline," Ziad Daoud, chief Middle East economist at Bloomberg Economics, said in a report before the announcement.

Kuwait's central bank, which maintains a peg to a basket of currencies, said it skipped lowering rates to balance between the need to promote economic growth and ensure the dinar remains attractive for savings. BLOOMBERG