BNY’s Geoff Yu says APAC’s hawkish rate surprises, including Sri Lanka’s 100 bp hike, have failed to revive front-end fixed income flows. Sub-1y flows remain negative, while higher US rate expectations and import bills keep IDR, INR and North Asia FX under pressure.

Front-end flows weak despite APAC hikes

"Sri Lanka’s central bank decision rarely commands much attention, but yesterday’s 100bp hike to 8.75% (vs. expectations of 50bp) marks another hawkish surprise in South and Southeast Asia – a region grappling with supply pressures and weakening currencies. The country has suffered severe balance-of-payments challenges in the past, and the central bank is clearly seeking to shore up flows without expending limited reserves."

"The recent round of hawkish surprises in APAC has not helped the carry trade materially. Currency pressures aside, front-end flows into APAC fixed income have not been strong. The sub-1y part of the curve – the segment most closely tied to liquidity preference, as in carry trades – has been negative on a weekly smoothed basis since early April and shows no sign of reversal."

"Coupled with headline price risks from food and other imported primary goods, central banks may need to move more aggressively to help stabilize currencies. The Bank of Japan is expected to lead the way."

"With U.S. rate expectations also shifting higher, APAC will likely continue to struggle in front-end fixed income: IDR and INR offer yield potential but are weighed down by balance-of-payments stress. For larger, savings-heavy North Asia economies, higher import bills are weighing on FX performance, while policymakers remain reluctant to raise rates: China’s medium-term lending rate has fallen to a new low despite an evident shift toward PPI- and CPI-driven inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)