NEW YORK, Oct 26 — BlackRock Inc, the world’s largest money manager, has turned less bullish on local-currency bonds in Asia as it sees US yields rising on the back of a Federal Reserve interest-rate increase in December.
The 10-year Treasury yield may rise to as high as 2.50 per cent by end-2017, according to Neeraj Seth, the head of Asia credit at BlackRock, which oversees about US$6 trillion globally. The firm has become more selective on its investments in the region, given the divergence in monetary policy expectations and fiscal positions in different nations, he said.
Given BlackRock’s view that US rates will drift higher from here, it has “reduced the long-duration positioning” it had in Asia, Seth said in a phone interview from Singapore.
“So, it’s still long but it’s less long. We are cautious on some of the lower-yielding markets.”
The Fed began shrinking its balance sheet this month and pricing in federal funds futures contracts shows that investors see the probability of a December rate hike at about 84 per cent. The 10-year Treasury yield touched 2.47 per cent yesterday, the highest since March. Seth forecasts it to move in a range of 2.30 per cent to 2.50 per cent by December 31.
The median forecast in a Bloomberg survey is for the 10-year yield to end 2017 at 2.46 per cent before rising to 2.57 per cent by March.
BlackRock is underweight on securities in the Philippines and Thailand, while being neutral on those in Malaysia and Korea, Seth said.
“The low yielders that you have in Asia have a fairly high correlation with the US,” he added.
“And that’s part of the reason you see the shift in terms of being more selective.”
The money manager likes bonds in China, Indonesia and also India, where it pared some exposure last month.
Rupee bonds
India’s benchmark 10-year sovereign bonds are set to cap a third straight monthly decline, which will be the longest run since April 2015. The selloff in one of Asia’s most sought-after investment destinations has been fueled by concern the government will fail to meet its fiscal deficit target for the current financial year and worries that faster inflation will prevent the central bank from lowering interest rates further.
“Though we reduced some exposure in the Indian local market in September, we continue to remain positive and long in terms of our positioning,” Seth said in last week’s interview.
“In the medium-term, we may see stabilisation or even further structural decline in inflation that, along with the path for fiscal consolidation, would open room for further easing of monetary policy and push bond yields lower.”
BlackRock is still overweight Indian bonds and has positions across the curve, more so in the five-to-10 year part of the curve, Seth said, adding that he expects the Reserve Bank of India to cut rates one more time this year or in early 2018.
“India is an integral part of our investment plan,” he said.
“It remains one of the important exposures overall.”
Rupee bonds fell yesterday on speculation a government plan to issue special debt to recapitalize state-run lenders will crimp demand for existing securities. At 6.81 per cent, India’s 10-year yield is the highest among major Asian markets.
Here are some more comments from Seth:
“In Philippines, there is a little more focus from the new government on growth and expansionary policies, which is not positive for the government bonds".
“There is potential for inflation to pick up and fiscal balances are seen less supportive”.
“It’s not a positive backdrop from a fixed income perspective” Positioning in Malaysia will depend on valuations For Asian dollar credit, “the outlook still remains positive given the global macro-backdrop, which continues to be supportive”.
On Indian corporate bonds: “Corporate bond positioning is driven by liquidity” more than anything else In this universe, the 5-year part of the curve “is where you would find liquidity, so our corporate bond positioning is within the 4-7 year part of the curve”. — Bloomberg
