Emerging Asia’s real yields surge in split with nominal rates

(Oct 23): Yields on emerging Asian bonds after adjusting for inflation have surged versus nominal yields, raising the appeal of the region’s debt.

An average of seven emerging Asian 10-year yields adjusted for inflation — also known as real yields — has risen to the highest since 2019 while nominal rates drifted to a four-year low, as per data compiled by Bloomberg. The dynamic suggests emerging Asian central banks have room to cut policy rates, as inflation remains benign with rice prices down to a decade low and Brent crude near the lowest in five months.

Slowing inflation has boosted real yields particularly in the Philippines and India, propelling them to among the highest in the region, as per Bloomberg calculations. Softer price pressures in the region also support the case for buying debt with headline inflation in Thailand, the Philippines, India and China below their respective official targets.

“Many Asian countries are still offering attractive real yields,” Clifford Lau, a Singapore-based portfolio manager at William Blair Investment Management, said. He sees the biggest potential for rate cuts in Indonesia, the Philippines and Thailand, and prefers positioning in the short-end of the yield curve.

India’s 10-year real yields stand at around 500 basis points, which is 2.8 standard deviations above the five-year average gap. For the Philippines it is 1.4 standard deviations. Both offer some of the highest yields on a relative basis in the global emerging-market space.

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Other investors are also seeing pockets of opportunity in Asian bonds.

Markets that have not priced any central bank easing are attractive, said Navin Saigal, Asia Pacific head of fundamental fixed-income at BlackRock Inc. “Countries where nominal rates and real rates are both high like in India, I think those are really interesting opportunities.”

The table shows inflation in most Asian nations is below their central banks’ targets:

See also: Bank Indonesia pauses rate cuts to allow policy transmission

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