Nomura recommends reducing Asia rates trading risk ahead of the FOMC, while maintaining a medium-term view for higher rates

Overview

This report is Nomura's Asia rates strategy research, with the core message of reducing risk in some relative value trades ahead of the FOMC while maintaining a medium-term bearish view on Asian rates. The report argues that the market debate around Fed policy has shifted from whether to cut to whether to hike or stay unchanged, so even if the Fed does not hike this week, term premium may still remain in pricing; meanwhile, easing related to Iran has not fully eliminated the geopolitical risk premium in energy prices.

Core views

The main theme of the report is "higher Asian rates in the medium term, lower event risk in the short term." Specifically, Nomura exits the 5-year Korea versus Taiwan receive-rate relative value trade, but believes weaker KOSPI, lower USD/KRW, and a declining loan-to-deposit ratio in the Korean banking system may limit upside in Korean rates; on Taiwan, the CBC may still lag the curve relative to growth and inflation prospects, but the attractiveness of paying 5-year NDiRS above 2.30% is limited. The report continues to hold the receive position in Hong Kong 5y forward 5y IRS, with a target of 3.55%, and maintains the pay position in China 3-year NDIRS, on the basis that downside room in the 7-day repo fixing rate is limited and the PBoC may keep policy rates and the RRR unchanged in 2026.

Analysis framework

The report combines macro policy expectations, event risk, energy prices, monetary policy paths, yield curve shape, market technical positioning, and local supply-demand factors to make rates trading judgments. Fed policy expectations and energy prices are used to judge the medium-term direction of Asian rates; factors such as KOSPI, USD/KRW, Korean banks' loan-to-deposit ratios, Taiwan inflation data, TGB and CBC NCD auctions, Hong Kong bond issuance and loan growth, China's 7-day repo fixing rate, and technology breakthroughs are used to assess relative value trades across regions.

Methodology notes

• Fixed income strategyRelative value and directional rates trading framework

  Construct trades through differences in rate movements across markets, tenors, and instruments.

  The report's receive Korea versus Taiwan, receive Hong Kong IRS, and pay China NDIRS are all fixed income strategy recommendations, and the time horizon may differ depending on whether the trade is tactical or strategic.

• Macro policy analysisCentral bank reaction function and term premium assessment

  Assess rates risk premium based on the policy paths of central banks such as the Fed, BOK, CBC, and PBoC.

  The report believes that rising discussion of Fed hiking risk will preserve term premium; the Bank of Korea's hiking path is largely already priced by the market; Taiwan's central bank may lag growth and inflation prospects; and China's policy rates and RRR are expected to remain unchanged.

• Market technical and supply-demand analysisRate levels, curve, and local supply-demand signals

  Combine key technical levels, issuance supply, loan growth, and bank allocation demand to judge trade timing.

  The report mentions that India's 5-year NDOIS is close to its 200-day moving average, Taiwan's 5-year NDiRS failed twice to break above 2.40%, Hong Kong non-financial bond issuance has slowed and loan growth is weak, and Korea's declining loan-to-deposit ratio may support banks increasing bond holdings.

Asset mapping & comparison

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

• Korea Sep-5y rates versus Taiwan 5y NDiRS

  Relative value trade, previously receive Korea and pay Taiwan; exited and confidence lowered ahead of the FOMC

  Strengths

  Weaker Korean equities, lower USD/KRW, and a declining Korean loan-to-deposit ratio may reduce aggressive hiking risk and support bond demand.

  Weaknesses

  The BOK is still expected to hike in August and October, and FOMC event risk may amplify rate volatility.

  Comparison

  On the Taiwan side, the CBC may lag growth and inflation, but the attractiveness of paying 5-year NDiRS above 2.30% is not strong, and it previously failed twice to break above 2.40%.

  Risks

  A Fed hawkish surprise, Korean inflation or FX pressure, and Taiwan CPI above expectations could all change the relative performance.

• Hong Kong 5yfwd5y IRS

  Maintain long-end receive position, target 3.55%, confidence 3/5

  Strengths

  In a more hawkish Fed scenario, the U.S. long end may remain stable or move lower, while slower Hong Kong non-financial bond issuance and weak loan growth may also compress the HK-US IRS spread.

  Weaknesses

  This trade depends on U.S. long-end rates not moving materially higher and continued weakness in local Hong Kong supply-demand.

  Comparison

  Compared with the Korea/Taiwan trade, the report has higher confidence in receiving the Hong Kong long end.

  Risks

  A renewed rise in U.S. long-end yields, a rebound in Hong Kong bond supply, or improved loan demand would weaken the trade logic.

• China Sep-3y NDIRS

  Maintain pay position, currently about 1.435%

  Strengths

  There is limited downside room in the 7-day repo fixing rate; the PBoC is expected to keep policy rates and the RRR unchanged in 2026; and China's technology breakthroughs may provide a floor for rates.

  Weaknesses

  Traditional sectors, especially real estate, still face persistent headwinds, which may weigh on growth and rates.

  Comparison

  Unlike receiving the Hong Kong long end, the China trade is biased toward paying 3-year rates, reflecting divergence in regional rate direction.

  Risks

  If the PBoC unexpectedly eases, repo rates decline, or property pressures intensify, the China NDIRS pay position may come under pressure.

• India 5y NDOIS

  Watch for whether to re-establish a pay position

  Strengths

  If oil returns to USD70-75/bbl, inflation and external balance pressures may once again support a pay-rates trade.

  Weaknesses

  The previous position was already closed for profit, and there is no re-entry at present.

  Comparison

  The India trade depends more on oil prices and technical triggers, rather than being a core position to execute immediately.

  Risks

  A drop in oil prices, improved global risk appetite, or rising expectations of local policy easing would reduce the attractiveness of paying rates.

Key data

• Korea versus Taiwan 5-year rate relative value tradeExited; confidence lowered to 2/5Previously receive Sep-5y Korea versus Taiwan at a 1:1 DV01 ratio; the Taiwan pay leg was halved last Friday, and the trade is now exited ahead of the FOMC.
• Current rate levels in Korea and TaiwanAbout 4.06% and 2.345%The report disclosed the current levels at the time of exiting the trade; the Taiwan figure comes from OCR text "2.x345%" and can be read as about 2.345%.
• Hong Kong IRS tradereceive 5yfwd5y HK IRS, target 3.55%, confidence 3/5The report believes that if the Fed turns more hawkish, the U.S. Treasury curve may flatten in a twist, with the long end stable or lower, benefiting long-end receive positions in Hong Kong.
• China NDIRS tradepay Sep-3y NDIRS, currently about 1.435%, indicated DV01 about USD3kThe core rationale is that downside room in the 7-day repo fixing rate is limited, and economists expect the PBoC to keep policy rates and the RRR unchanged in 2026.
• India rates watch conditionIf oil returns to USD70-75/bbl, a 5-year NDOIS pay trade may be reconsideredThe previous 5-year NDOIS pay position had already been closed for profit.
• Taiwan trigger factorJuly CPI above expectations could become a breakout catalystThe report notes that the relevant data is expected to be released on August 6 and could drive a breakout in 5-year NDiRS.

Impact & implications

For investors, the report suggests it is inadvisable to maintain excessive event-risk exposure ahead of the FOMC, but medium-term vigilance is still needed against Asian rates rising or staying high. At the portfolio level, the bias is toward retaining higher-conviction regional relative value views: receiving the Hong Kong long end benefits from lower U.S. long-end yields and weak local supply-demand, while paying China short- to mid-end rates is supported by limited room for policy rates and repo rates to move lower; the Korea versus Taiwan trade is exited for now because of event risk and reduced attractiveness of Taiwan rate levels.

Risks

• The FOMC outcome and post-meeting communication may materially change Fed term premium and the direction of Asian rates.
• If the geopolitical risk premium in energy prices fades, upward pressure on Asian rates may weaken.
• If the policy paths of the BOK, CBC, or PBoC deviate from the report's assumptions, the relevant trades may fail.
• If Taiwan's July CPI comes in above expectations, it may push Taiwan rates into a breakout and change the Korea versus Taiwan relative value view.
• If Hong Kong local bond issuance, loan growth, or the HK-US IRS spread move in the opposite direction, the logic for receiving the Hong Kong long end will weaken.
• If headwinds in China's traditional sectors such as real estate intensify, they may push China rates lower and be unfavorable for pay positions.

What to watch

• Whether the FOMC policy decision, dot plot, or statement language turns more hawkish.
• Whether oil prices return to the USD70-75/bbl range.
• Trends in Korea's KOSPI, USD/KRW, and the banking system loan-to-deposit ratio.
• Taiwan's July CPI data and whether 5-year NDiRS breaks above 2.40%.
• Hong Kong non-financial bond issuance, loan growth, and the HK-US IRS spread.
• China's 7-day repo fixing rate, PBoC policy rate and RRR decisions, and support from technology sector progress for the floor in rates.