Suspension of interest rate hike cycle is good for Asian bond market

As mentioned in the previous issue, regardless of the US property market, oil price or gold price growth, it indicates that US inflation will have downward pressure next year, and the recent decade-long two-year government bond yields decline, indicating that economic growth is slowing down, and the capital market investment climate is estimated. Further decline, therefore, the author believes that the bond market will be the focus of investment next year. Under the prospect of the Fed’s suspension of interest rate hikes, what impact will it have on the bond market? Which region’s bond market is more attractive?

First look at the relationship between official interest rates and the return of Treasury bonds. Figure 1 shows that the growth of the two is strongly inversely proportional. If the current interest rate futures are displayed, the Fed will have two interest rate hikes in the coming year (this month and March next year), and the US official interest rate is expected to change year by year. A green line indicates a slight decline, while the Treasury bond return growth should begin to pick up.

Then compare the growth of US Treasury returns and the growth of global and emerging bond markets, and draw Figure 2. Undoubtedly, because the United States is the world’s largest bond market, it can be seen that the growth of US Treasury returns is strongly in line with the growth of global bond markets. Although the relationship between the growth of emerging bond market returns and the growth of US Treasury bonds is slightly inferior to the global bond market and the US debt, it is also directly proportional. Therefore, it is expected that the emerging bond market will benefit in the market.

In fact, the return growth of emerging bond markets lags behind the return of US Treasury bonds for about seven months (as shown in Figure 3). Even though there are occasional short-term deviations, the overall direction is the same. If it is replaced by the growth of emerging debts and the growth of MSCI’s emerging exchange rate, its trend is closer to the growth of US Treasury returns, which shows that the short-term deviation should be affected by the exchange rate. According to this relationship, as Red Arrow predicts, it is estimated that the growth of emerging debt returns will rise in the coming year.

Look at the performance of debt returns in different emerging regions. Figure 4 shows the return on US Treasury returns and the performance of emerging bond markets in Asia Pacific, Europe, the Middle East, Africa and the Americas. Comparing the slopes of the returning parties in various places, it can be seen that the growth of the return of US Treasury bonds drives the growth of the emerging bond market in the Asia-Pacific region to be higher than that of other markets. In contrast, the growth of the emerging bond market in the Americas is lower.

From the point of view, it is estimated that the Federal Reserve will suspend the interest rate hike cycle, and it is expected that the emerging countries bond market in the Asia-Pacific region will benefit more, and it will be the market that investors focus on next year.

In fact, it is not difficult to find that many large fund institutions have announced that they will adjust the distribution of funds–reducing shareholdings and increasing debt holding. The investment strategy is in line with the above results.