Asia rates Report Interpretation

Overview

This Asia-rates update sets out Nomura's cautious regional macro view and two tactical relative-value trades. It sees Korea's curve as supported at the long end, while retaining a reduced Hong Kong-versus-Singapore position amid weaker near-term Hong Kong sentiment.

Core views

Nomura says Asia rates, US rates and oil prices were volatile over the preceding week. Rates and oil initially declined on expectations of a possible Iran peace deal, then partly reversed as geopolitical optimism faded. The institution remains cautious on the external setting for Asia rates because it expects Fed-hike expectations and oil-price volatility to persist. It nevertheless expects markets with improving fiscal outlooks, bond supply and valuations—such as Korea—to outperform. The report scales into a March 2s7s Korea NDIRS flattener, targeting 0bp by end-September and overweighting the receive 7-year leg by one-third; the cited 7-year level is 4.075%. Following the previous two weeks' rally, Nomura sees limited further downside in Korean front-end rates because its economics team retains an August rate hike as its base case. It also expects CPI inflation to rebound in August, partly because July's decline creates a base effect. At the long end, the report has turned more positive: expected WGBI inflows and the Ministry of Economy and Finance's reduction of KTB issuance sizes and tenors since June are supportive, with the latter linked to expectations of strong tax revenue from the semiconductor boom. Rising bank deposits may add KTB demand; the bank loan-to-deposit ratio fell to 112.8% in May from 116.2% in January. Nomura does not extend this view to the very long end, however, and advises against flatteners that receive 10-year or longer NDIRS because 30-year KTBs remain weak. Nomura maintains a receive 5y5y Hong Kong versus Singapore position, while reducing the Hong Kong leg by half. It expects the long-end Hong Kong-versus-Singapore spread to compress because April's surge in non-financial long-end Hong Kong corporate-bond supply has slowed. Hong Kong's loan-to-deposit ratio has remained near 70% as weak loan demand and elevated borrowing costs persist, whereas Singapore's local-currency and US-dollar loan-to-deposit ratios have increased over the past three months. The report notes that the Singapore 5s10s curve remains flat because 5-year SORA is high relative to SGS yields and two long-tenor SGS auctions, at 10 and 15 years, remain scheduled before the end of the third quarter. The Hong Kong leg is reduced tactically because recent price action has been unfavorable. Nomura also flags reports that Chinese tax authorities may impose a 20% levy on offshore insurance-policy dividends, which could hurt sentiment toward Hong Kong fixed-income products even though the levy’s scope remains uncertain. With spot USD/HKD above 7.84, Nomura sees no positive near-term catalyst for Hong Kong rates sentiment. It adds that the IRS curve would most likely flatten if USD/HKD rises to 7.85 and ultimately requires HKMA liquidity withdrawal.

Analysis framework

Nomura combines its macro outlook with relative-value curve analysis. It assesses policy expectations, inflation, bond issuance, capital inflows, banking-system loan-to-deposit ratios, corporate-bond supply, benchmark-rate relationships and upcoming government-bond auctions to identify tactical curve and cross-market spread trades.

Methodology notes

• Fixed Income and CreditYield curve analysis

  Yield-curve and cross-market spread analysis

  The report evaluates expected moves in Korea's 2s7s curve, Hong Kong and Singapore 5y5y spreads, and curve segments including 5s10s and the very long end to frame relative-value positions.

• Industry AnalysisSupply-demand framework

  Bond supply-demand assessment

  Nomura links KTB issuance reductions, expected WGBI inflows and deposit growth to Korean bond demand, and links slowing Hong Kong corporate-bond supply and scheduled SGS auctions to relative-rate moves.

Asset mapping & comparison

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

• Korea Mar-2s7s NDIRS flattener

  Nomura enters the position expecting the long end to outperform and targets 0bp by end-September.

  Strengths

  Expected WGBI inflows, reduced KTB issuance and potential incremental demand from deposit growth support the long end.

  Weaknesses

  Front-end rates have limited downside after the recent rally because an August hike remains the base case.

  Comparison

  The position favors the 7-year receive leg over the 2-year leg.

  Risks

  The report says 10-year and longer receive flatteners should be avoided because the very long end, including 30-year KTBs, remains weak.

• Receive 5y5y Hong Kong versus Singapore

  Nomura maintains the trade on expected compression of the long-end Hong Kong-versus-Singapore spread, with the Hong Kong leg reduced by half.

  Strengths

  Slowing Hong Kong non-financial long-end corporate-bond supply and persistently low Hong Kong loan demand support the relative view.

  Weaknesses

  Recent price action has been unfavorable and Hong Kong lacks a positive near-term catalyst.

  Comparison

  Singapore loan-to-deposit ratios have risen over the past three months, while Hong Kong's remains near 70%; Singapore also faces 10-year and 15-year SGS auctions before end-Q3.

  Risks

  Potential taxation of offshore insurance-policy dividends, uncertain implementation scope and USD/HKD remaining above 7.84 could hurt Hong Kong rates sentiment.

Key data

• Korea Mar-2s7s NDIRS target0bp by end-SeptemberTarget for the scaled-in Korea flattener position.
• Korea receive 7-year level4.075%Current level cited for the overweight receive 7-year leg.
• Korea bank loan-to-deposit ratio112.8% in May versus 116.2% in JanuaryThe decline is cited as evidence that stronger deposit growth could generate incremental KTB demand.
• Hong Kong loan-to-deposit ratioClose to 70%The report links the low ratio to weak loan demand and elevated borrowing costs.
• Potential offshore insurance-dividend levy20%Reported Chinese tax measure that could weigh on sentiment, with application scope uncertain.
• Spot USD/HKDAbove 7.84; 7.85 threshold discussedA move to 7.85 could eventually require HKMA liquidity withdrawal and likely flatten the IRS curve.

Impact & implications

The report favors selective relative-value positioning rather than a broad bullish Asia-rates view. It sees Korea's intermediate-to-long curve as relatively well supported, while Hong Kong's structural funding conditions support spread compression against Singapore but near-term sentiment warrants a smaller Hong Kong exposure.

Risks

• Persistent Fed-hike expectations and oil-price volatility could sustain a difficult external backdrop for Asia rates.
• Korea's very long-end KTB curve, including 30-year bonds, remains weak.
• The reported 20% offshore insurance-policy dividend levy could weigh on Hong Kong fixed-income sentiment, although its scope is uncertain.
• Recent unfavorable price action and the absence of a positive near-term Hong Kong catalyst could hinder the Hong Kong-versus-Singapore position.