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Economics – Markets – Strategy Yield
Yield: Bearish
• US: We believe Treasury yields will rise more than 100bps in the remaining
months of this year. With improving economic growth, inflationary
pressures that may not be temporary, and increasing bond supply, we are
bearish on the US bond market, which we think will have to discount
substantial Fed tightening for 2009
• SG: With the Fed rate cut cycle having come to an end, upward pressures
are building on SGD rates. A rise in US Treasury yields in 2H08 on the back
of more aggressive Fed rate hike expectations is expected to put SGS yields
under upward pressure
• HK: As the HKD remains credibly pegged against the USD, HKD rates continue
to track USD rates. Moreover, as USD/HKD forwards continue to reflect a
HKD appreciation bias, Hibor-Libor spreads continue to be steady
• KR: Stagflation dynamics are keeping the Bank of Korea on hold and the
market guessing whether the next move from the central bank will be up
or down. The market will likely struggle for direction in 3Q08
• TW: Chances are that the CBC’s rate hike cycle is not yet over and that the
central bank will lift the benchmark rediscount rate to 3.875% from 3.5%
over the next three meetings. We expect bond yields to be under upward
pressure in 2H08
• TH: While the Bank of Thailand has kept its policy rate unchanged in 2Q08,
a rate hike scenario has been gaining momentum. Given that the sell-off in
2Q08 has taken yields to levels that reflect a good chance of significantly
tighter monetary policy conditions, the sell-off in front-end yields should
come to an end soon
• ID: Long-end Indonesian Government bonds are a buy. We expect yields to
fall in 2H08 and the curve to steepen, as policy rates are unlikely to rise to
13% again
• PH: Bangko Sentral ng Pilipinas on June 5 lifted its policy rates by 25bps to
rein in inflationary expectations. This is bad news for the bond market and
means yields will remain under upward pressure. A sharp rise from current
levels is however unlikely, given that the bulk of the sell-off in the bond
market has already occurred
• MY: With rate hikes having been discounted at the front end of the yield
curve and investors being better compensated for inflation risks, we believe
yields are unlikely to rise much from current levels
• IN: The direction of gilt yields remains a tough call, but we remain
comfortable with our rate hike forecast. Inflation risks are even more
prominent now after the hike in diesel and petrol prices earlier this month
and the growth outlook is not weak enough to keep the RBI on hold
• CH: Against our expectation, government bond yields continue to trade
sideways as the market refuses to discount the rate hikes we expect. We
think that the market is too complacent about inflation and rate hike risks
YIELD
Jens Lauschke • (65) 6224 2574 • jensjoerg@dbs.com
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