Fed policies shape APAC bond markets

The impact of Federal Reserve's decisions on Asia-Pacific local currency bonds reflects in interest rates.

The transmission of Fed policies to local currency bonds in the Asia-Pacific (APAC) region unfolds through two primary channels: global interest rates and currency valuations, according to trading platform MarketAxess.

According to Riad Chowdhury, Head of Asia-Pacific at MarketAxess, the Fed's decisions directly influence global interest rates, thereby making APAC bonds more or less appealing compared to US dollar-denominated assets, such as US Treasuries. 

For instance, a potential cut in US interest rates may lead to a weaker dollar, enhancing the attractiveness of APAC local currency bonds to investors. This dynamic, Chowdhury explained, can lead to increased buying activity in these bonds. 

"The way the Fed policy influences local currency bonds is really two ways. One is what investors referred to as duration... And the other is FX," Chowdhury states, highlighting the integral role of yield and currency appreciation or depreciation in investment decisions.

He said that investor behaviour towards APAC local currency bonds varies, with some investors dedicated solely to these markets, while others evaluate their attractiveness relative to other regions. 

Despite differing investment mandates, MarketAxess has observed significant growth in the trading of APAC local currency bonds on its platform. "In 2023, the volume traded of Asia, local currency bonds on our platform increased by 42% over the previous year," Chowdhury revealed, noting that these bonds now account for a substantial portion of global trading volume.

The diverging monetary policies across regions also impact cross-border wealth management strategies in Asia. Wealth management, particularly through private banks in Asia, has seen a shift in investment activity. 

Historically focused on high-yield bonds in Asia, there is now a noticeable pivot towards US investment-grade bonds, which currently offer higher ratings and attractive yields in dollar terms. 

"We have definitely seen... the impact of Fed policy decisions in the wealth management sector as well," Chowdhury observed, underscoring the significant influence of US monetary policies on investment patterns within the APAC region.