According to BNY's Geoff Yu, recent hawkish monetary policy surprises in the Asia-Pacific (APAC) region, including Sri Lanka's unexpected 100 basis point rate hike to 8.75% (versus expectations of a 50 basis point increase), have not succeeded in reviving front-end fixed income flows in the region [1]. Despite these aggressive moves, sub-1-year flows remain negative on a weekly smoothed basis since early April and show no signs of reversal [1].
The report highlights that higher U.S. rate expectations and increased import bills are exerting pressure on APAC currencies, particularly the Indonesian rupiah (IDR), Indian rupee (INR), and currencies in North Asia [1]. While IDR and INR offer yield potential, they are weighed down by ongoing balance-of-payments stress [1]. In North Asia, larger economies with significant savings are experiencing FX underperformance due to higher import costs, and policymakers have been reluctant to raise rates; for example, China's medium-term lending rate has fallen to a new low despite rising inflation pressures [1].
BNY notes that, given headline price risks from food and other imported goods, central banks in the region may need to act more aggressively to stabilize their currencies, with the Bank of Japan expected to take the lead [1]. However, the current environment of higher U.S. rates suggests that APAC will likely continue to face challenges in attracting front-end fixed income flows [1].
CONCLUSION
Recent hawkish rate hikes in APAC, including Sri Lanka's 100bp move, have not succeeded in attracting front-end fixed income flows, as currency and balance-of-payments pressures persist. With U.S. rate expectations rising and import bills increasing, APAC currencies and fixed income markets are likely to remain under pressure in the near term.