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Asia rates and currencies took a breather on the recent retreat in UST yields. Among the Asia government bonds, we continue to favor CGBs and IGBs. The respective 10Y yields are falling at a faster pace amongst the peers. Investors are also benefiting from the resilient CNY and INR exchange rates. In the DM space, HKD rates should see receive opportunities. Curve-wise, steepening is at play for all three government bonds.
China: CGB yields continue to fall after the LPR and MLF cuts in late July, while the uneven growth momentum calls for more easing ahead. The accelerating 3-month moving average export growth is a cold comfort, as the contracting NBS and Caixin PMIs point to slower export growth in the months ahead. Domestic demand is also restrained by the property market rout and its negative wealth effect on consumption. Meanwhile, the window for further cuts is opened amid stabilizing CNY exchange rates. Strategy-wise, we expect tactical flattening should take a pause. Short-end and belly yields will stay anchored amid rate cuts, while long-end yields will be well supported by the increasing >10Y CGB issuance.
India: Likewise, the 10Y IGB fell by 31bps YTD, while INR barely depreciated against the USD. This is attributed to tailwinds from India’s eligible bonds being included in the JPM-EM index and Bloomberg’s EM Local Currency Index. The ongoing FDI inflow and improving trade balance are also keeping INR rates at bay. Domestically, yields could trend lower amid the narrower budget deficit target. Curve-wise, steepening is at play. As newly issued 14Y and 30Y tenor papers are now excluded from foreign investor eligible securities, foreign investors may favor 10Y IGBs and below.
Hong Kong: HKD rates have started to retreat alongside USD rates on building rate cut expectations. Firstly, seasonal demand for HKD from dividend payments is fading. Secondly, demand for HKD from the asset market also appears to be easing alongside the abating uptrend in the Hang Seng Index. In fact, the HSI has already returned to the 17,000 level after testing resistance at 19,500 in mid-May. On the FX front, HKD is strengthening against the USD alongside the upcoming rate cut cycle.
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