Yahoo Finance Record High Taiwan Swaps Prompt Rethink of Excess Rate Hike Bets
(Bloomberg) -- Traders are looking to trim excessive policy tightening bets in Taiwan as hawkish central bank moves keep swap rates near record highs.
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Taiwan’s one and two-year swap rates, measures of interest rate expectations over those periods, have been trading near their peaks after the island’s central bank last month unexpectedly raised the amount of funds lenders must hold in reserve. That’s after it announced a surprise rate hike in March to tame price pressures.
With Taiwan’s swap markets now pricing around three hikes of 12.5 basis points apiece over the next 12 months, some strategists see room for yields to decline and are recommending receiver trades that would profit in such a scenario.
“Although the curve has steepened, scope for it to run further in the near term looks limited,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore. “The degree of tightening priced is significant versus history and may even prove excessive. This could, at the margin, present an opportunity to wade in to receiving front-end rates.”
Domestic inflation has softened and become less of a worry for officials, while expectations for Federal Reserve rate cuts this year could also weigh on Taiwan’s borrowing costs in the later half of 2024.
Bank of America Corp. recommended receiving Taiwan’s interest rate swaps in a note last week while calling steepness in the swaps curve “unwarranted.”
“The current IRS pricing is some 20 basis-points higher than the level right before the central bank’s June meeting, which is certainty too much,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “However you measure it, receivers seem good.”
Underpinned by a resilient economy amid the Artificial Intelligence boom, Taiwan’s monetary policy has so far diverged from most major economies. That’s opened up more trading opportunities on the island’s rates outlook. Central bank Governor Yang Chin-long said on Tuesday that the monetary authority won’t necessarily follow the Fed in cutting rates.
“Across Asia, Taiwan’s interest rate swap market has been the most dramatic for sure this year” as most others are on the course to ease monetary policy, Chiu said.
Rarely Active
“It’s worth remembering that Taiwan rates are normally one of the quieter markets in the region,” McNicholas said. “The events of the last year and CBC’s response has prompted significantly more activity and interest than has historically been the case.”
“The higher volatility in the curve should support greater interest in the market, particularly as it has typically been far less correlated with the US curve,” he said.
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