Asia ex-Japan rates strategy Report Interpretation

Overview

Nomura’s Asia ex-Japan rates note retains a broad bias toward paying rates but reduces exposure because carry is negative and US policy developments can quickly disrupt trades. The report updates relative-value positioning in Singapore and Hong Kong, closes an India trade and maintains a small Korea receive position.

Core views

Nomura continues to hold a broad pay stance in Asia rates despite weaker-than-expected US nonfarm payroll and inflation data. Its rationale is that markets are still likely to view a Fed hike as the next move, oil should retain a geopolitical premium, and average Asia PMI excluding China has remained above 50, indicating stable regional growth. The report also places Asia within a broader rise in developed-market long-end yields, which it links to fiscal-sustainability concerns, reduced pension-fund demand as plans move toward defined-contribution structures, heavier investment-grade issuance—particularly by hyperscalers—and concern that some central banks may be behind the inflation curve. The institution nevertheless argues that holding pay positions through a rising-rate trend is not always attractive because of negative carry and the unpredictability of US policy, including policy related to Iran. It therefore views current levels as an opportunity to reduce aggregate pay exposure rather than abandon the directional view. For Singapore versus Hong Kong, Nomura reduces its recommended pay 5y5y SGD versus HK position from a 2:1 to a 1:1 DV01 ratio. Singapore rates steepened alongside global moves and potentially increased bond supply, including the HDB 2041 issue. Nomura still expects the Singapore spread versus US and Hong Kong rates to narrow, citing its economists’ above-consensus growth and inflation forecasts and evidence that the SORA fixing is rising. However, the 5s10s SGD spread has returned to 33bp and a 10-year SGS size announcement is due Friday; because year-end issuance sizes are typically smaller, the report says the SGD leg may need reassessment shortly. Hong Kong long-end rates have underperformed the US despite USD/HKD consolidating ahead of 7.85 and without a meaningful pickup in non-financial Hong Kong bond issuance, leading Nomura to prefer increasing receive-HK exposure on bounces. In India, Nomura closes its pay September 5-year position at 6.438%. It still identifies several potentially negative rate factors: early closure of the FCNR(B) scheme, the oil-price rebound, Bloomberg’s delayed inclusion of Indian government bonds, El Niño risk and potentially higher fourth-quarter inflation from base effects. But it judges the curve more neutral because interbank liquidity is likely to remain ample and the 1s5s NDOIS spread has returned to 60bp. In Korea, rates have rebounded with oil prices and US rates over the prior two weeks, while long-end 20- and 30-year KTBs have been weak. Nomura nonetheless retains a small receive position in 7-year Korea swaps into the Bank of Korea meeting the following week. Although its economists expect a hike that is not fully priced, it believes a hike need not materially affect 5- to 7-year swaps; those maturities depend more on the implied terminal-rate level, which Nomura sees as lower than a couple of months earlier given lower KOSPI and USD/KRW.

Analysis framework

Nomura begins with global long-end yield and Asian growth conditions to set its directional rates bias, then weighs carry and policy uncertainty before reducing overall exposure. It applies relative-value comparisons across Singapore, Hong Kong and US rates, uses curve spreads and funding conditions for India, and distinguishes a near-term policy-rate hike from longer-tenor terminal-rate pricing in Korea.

Methodology notes

• Industry AnalysisSupply-demand framework

  Bond supply-demand analysis

  The report relates long-end yield weakness to fiscal concerns, pension demand, corporate issuance and expected government-bond supply.

• Fixed Income and CreditYield curve analysis

  Yield-curve and swap-spread analysis

  Nomura uses the SGD 5s10s spread, the India 1s5s NDOIS spread, and the distinction between policy rates and 5- to 7-year swap pricing to form its trade views.

• Fixed Income and CreditSpread analysis

  Cross-market relative-value analysis

  The Singapore-versus-Hong Kong trade is assessed through relative rate performance and the expected narrowing of Singapore spreads versus US and Hong Kong rates.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 5y5y SGD versus HK rates

  Relative-value trade with a reduced pay-SGD versus HK DV01 ratio of 1:1.

  Strengths

  Above-consensus Singapore growth and inflation forecasts and higher SORA fixing support potential narrowing of Singapore spreads versus US and Hong Kong.

  Weaknesses

  The SGD curve has steepened and the 5s10s spread is back to 33bp.

  Comparison

  Singapore rates are assessed relative to Hong Kong and US rates; Hong Kong long-end rates have underperformed the US.

  Risks

  The upcoming 10-year SGS size announcement could require a near-term reassessment of the SGD leg.

• India Sep-5y rates

  Closed pay position.

  Weaknesses

  Nomura is more neutral on the India curve as liquidity is likely to remain flush and the 1s5s NDOIS spread has returned to 60bp.

  Risks

  Oil-price rebound, FCNR(B) scheme closure, delayed IGB inclusion, El Niño risk and higher fourth-quarter inflation from base effects remain potentially negative factors.

• Korea 7y swaps

  Maintain a small receive position into the BOK meeting.

  Strengths

  Nomura expects the implied terminal rate to be lower than a couple of months ago, supporting 5- to 7-year swap rates.

  Weaknesses

  Korean rates have risen with oil and US rates, while long-end KTBs have weakened.

  Comparison

  A potentially unpriced BOK hike is viewed as less important for 5- to 7-year swaps than the terminal-rate outlook.

  Risks

  The BOK hike expected by Nomura’s economists is not yet fully priced.

Key data

• SGD versus HK 5y5y trade DV01 ratio1:1Reduced from Nomura’s prior 2:1 pay-SGD versus HK recommendation.
• SGD 5s10s spread33bpA level prompting possible reassessment of the SGD leg.
• India pay Sep-5y closing level6.438%Nomura closes the position at this level.
• India 1s5s NDOIS spread60bpHaving returned to this level, it supports a more neutral India curve view.
• Korea swap positionSmall receive position in 7yMaintained into the following week’s BOK meeting.

Impact & implications

The report shifts from broad directional exposure toward more selective rate and cross-market positioning: less net pay risk, a smaller Singapore pay leg against Hong Kong, no India pay trade, and a retained Korea receive position whose logic rests on lower terminal-rate expectations.

Risks

• Unpredictable US policy developments, including those concerning Iran, can disrupt pay positions.
• El Niño risk and higher fourth-quarter Indian inflation from base effects are identified as negative India rate factors.

What to watch

• The 10-year SGS size announcement on Friday and whether it changes the assessment of the SGD leg.
• SORA fixing and Singapore growth and inflation conditions relevant to the expected SGD spread narrowing.
• Hong Kong long-end performance versus US rates, USD/HKD near 7.85 and non-financial Hong Kong bond issuance.
• Interbank liquidity and the 1s5s NDOIS spread in India.
• The Bank of Korea meeting next week and the response of 5- to 7-year Korea swaps.