(Bloomberg) — Taiwan’s government bonds are falling out of favor as traders fear stubborn inflation amid a solid economic outlook may pressure policymakers to hike interest rates again.
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Bearish sentiment peaked Monday as five-year government bonds were auctioned at a yield of 1.63%, the highest level since 2008. The yield on the island’s benchmark 10-year notes has risen 46 basis points this year, with a spike in March as the central bank unexpectedly raised borrowing costs to combat price pressure.
While traders globally have soured on fixed-income assets as the Federal Reserve delays its tightening, Taiwanese bonds face particular pressure under a resilient economy. A blowout exports figure earlier this month, bolstered by the global artificial-intelligence boom, suggests officials won’t be in a rush to ease any time soon. Higher electricity rates from this month are a key inflation risk.
“With a promising economic outlook supported by semiconductors and persistent upward price pressure from higher electricity prices, Taiwan sees a greater chance of keeping rates elevated or even hiking further,” said Gary Ng, a senior economist at Natixis SA. That stands in contrast to its Asian peers experiencing a gradual deceleration in inflation, he added.
The result of last week’s 10-year bond auction showed similarly lackluster demand. The bid-to-cover ratio was at 1.17, the lowest since Bloomberg started tracking the data in 2000.
The 10-year government bond yield closed at 1.67% on Friday, near the highest since November 2022.
The global rush for AI technology has been a boon for Taiwan with last month’s exports surging nearly 19%, the fastest pace in two years. The economy is expected to expand 3.2% this year, according to analysts surveyed by Bloomberg, more than double the pace of 1.3% in 2023.
While the latest inflation came in below estimates at 2.1%, concerns are that it may rise with the electricity price increase and strong consumer demand.
That puts Taiwanese bonds at an unfavorable position, especially when most Asian central bank peers are still expected to lower rates at some point later this year. Taiwan’s benchmark yield also tends to have a relatively high correlation with its Treasuries equivalent, according to Bloomberg Intelligence.
“The possibility of further interest rate hikes by the central bank cannot be ruled out, and the market has very little confidence in Taiwan debt now,” said Tim Yu, a trader at IBF Securities.
(Adds context on relationship to Treasuries.)
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