Newsflash

US 10-year yield jumps to a fresh 7-year high after unemployment rate falls to lowest in 49 years

  • Job creation for September falls to its lowest level in a year, but the unemployment rate drops to a level not seen since December 1969.

  • Closely-watched average hourly earnings rise 8 cents — or 0.3 percent — over the month, matching August’s gain.

  • The yield on the benchmark 10-year Treasury note returns to levels not seen since May 2011 following the release.


Rising US rates is expected to “compel” countries with negative and borderline real rates to raise their short term interest rates in order to stem tide of capital outflows, unless there is deliberation by the respective government to devalue its currency to boost exports (hence, re-balance current account).

Real Rate Comparison 07 Oct 18.png

Historically, the Malaysian 10Y government debt trades at a median spread of 118bps over UST. Currently, it is trading at 91bps over the US benchmark and hence, there is a possibility that Malaysian debt yield would need to increase by 27 bps in order to reach its historical median spread. Nevertheless, with considerable buffer in real interest rate, it is not expected that Malaysia will make any significant increase in short term rate in the immediate term.

Malaysia 10Y vs UST.png

Singapore 10Y government debt has historical median spread of negative 47bps against UST. Currently, it is trading at negative 60bps against USD, with a potential room for a marginal increase of approximately 14bps in Singapore debt yield in order to match up with its historical median spread.

SG 10Y vs UST.png

Since GFC, the yield spread between 10Y Indonesia and UST has been relatively stable, with a historical median spread of 546bps. Since beginning of 2018, Indonesia has been actively raising its short term rates to hedge against further devaluation in its currency. As such, there is only a marginal yield differential of 28bps (actual vs historical median) at this juncture.

IND vs UST.png

Thailand has a borderline positive real interest rate, hence it may need to catch up with raising its rates. This proposition is further supported by the fact that Thailand also has a low record unemployment rate of 1.0%. 10Y Thailand government debt trades at historical median spread of 57bps above the UST yield. Currently, it is trading at a yield spread of negative 33bps (i.e discount to UST yield), putting significant pressure on Thailand to normalise its rates. Further, Thailand’s general elections are expected to be held in Thailand in February 2019 and this may complicate matters.

TH vs UST.png

 

Rising rates will impact the bond market as well as the equity market (due to higher equity discount rate). Hence, it is important to identify which countries that are potentially at risk of greater quantum of rate hikes. Personally, I consider Thailand as the country with significant potential for greater quantum of rate hikes in order to match up with historical yield differential and inflationary pressures (perhaps after its general elections?).

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