Emerging Asian bonds with shorter tenors are proving to be more resilient to potential US interest rate fluctuations compared to their longer-term counterparts. Shorter-term debt in the region has shown less correlation with two-year US Treasury yields than longer-dated bonds, suggesting that bonds with shorter maturities from five Asian countries could better withstand any spike in US yields driven by trade tensions or tariff policies.
The emerging attractiveness of short-term bonds comes as investors react to tariff-related developments. US President Donald Trump has made conflicting statements regarding tariffs on Canada and Mexico, although a White House official confirmed the March 4 deadline. An additional report on possible reciprocal tariffs is expected in April, adding to the uncertainty.
Rajeev De Mello, portfolio manager at Gama Asset Management SA, noted that the likelihood of US tariff escalations remains high as trade reviews with China progress and reciprocal tariff strategies are being considered. He recommended that investors focus on shorter-to-mid maturity interest-rate swaps or local currency bonds as monetary policies across emerging Asian markets shift toward easing.
The possibility of increased US tariffs on Canada and Mexico earlier last month caused a spike in two-year US Treasury yields, as traders anticipated inflationary pressures that might hinder further rate cuts by the Federal Reserve. Despite recent declines in US yields, Federal Reserve officials, such as Raphael Bostic and Thomas Barkin, have indicated that US rates must stay restrictive to combat inflation.
The correlation between two-year US yields and 10-year Malaysian debt stands at 0.5, while the correlation with three-year Malaysian bonds is lower, at 0.2. This suggests that Malaysia’s longer-term debt may be more vulnerable to global trade tensions and any increases in US yields.
Goldman Sachs strategists, including Kamakshya Trivedi and Danny Suwanapruti, emphasized in a Feb. 12 note that shorter-term bonds provide lower exposure to shifting market pricing driven by tariff risks. These bonds are supported by continued rate cuts across emerging markets this year, especially in Southeast Asia.
The Bank of Thailand recently surprised markets by cutting rates by 25 basis points, while the Bank of Korea also reduced rates and hinted at more cuts later in the year. Meanwhile, the Bangko Sentral ng Pilipinas confirmed its commitment to easing policy, planning a 50 basis point rate cut for 2025 and a reduction of the reserve requirement ratio by 200 basis points next month.
As central banks in the region ease monetary policies, sovereign bonds, particularly those at the shorter end of the yield curve, are benefiting. Shorter-dated yields in Indonesia, Malaysia, Thailand, the Philippines, India, and South Korea have decreased by an average of 15 basis points so far this year, compared to a smaller decline of six basis points in 10-year yields.
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