Thu, 10 Mar 2011


By Lilian Karunungan and David Yong

Bonds from Taiwan are beating debt from Asia’s developing nations as surging oil prices punish economies with the fastest inflation.

Local-currency debt sold by Taiwan returned 1.4 percent this year, the best performance in the region excluding Japan. while Singaporean notes ranked third with a 1 percent return. Indonesian and Philippine securities, the biggest gainers last year, are now the worst performers, handing investors losses of 2.2 percent and 2.8 percent respectively as crude prices surged 15 percent in New York.

Taiwan, which also boasts Asia’s best performing currency in the past six months, has the slowest inflation in the region at 1.3 percent in February. Consumer prices are rising at least three times faster in the Philippines and Indonesia, where food and fuel accounts for a larger share of living expenses.

The market perceives “the central banks of Indonesia and the Philippines as behind the curve in combating inflationary pressure,” said Tamara Trinh, a portfolio manager in Frankfurt at Nomura Asset Management Co., a unit of Japan’s largest brokerage. If Taiwan and Singapore “fall behind in their drive to combat inflation, government bond markets there will likely be negatively affected as well,” she said.

Nomura Asset, Western Asset Management Co. and Mitsubishi- UFJ Asset Management Co. are favoring Asia’s investment-grade economies as developing-nation debt slumps globally. Emerging- market local bonds have fallen 0.8 percent this year, according to an index compiled by JPMorgan Chase & Co., after rallying 11 percent in 2010.

Policy Credibility

Debt from Hong Kong and Singapore performed the best in the region from Jan. 18, 2007 to July 11, 2008, when oil almost tripled to $147.27 a barrel. The bonds returned 8.7 percent and 5.2 percent, respectively, during the period.

The Central Bank of the Republic of China (Taiwan) raised borrowing costs three times last year to 1.625 percent. Singapore’s monetary authority uses the exchange rate rather than interest rates to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade-weighted band of currencies. Inflation reached 5.5 percent in January, the fastest since December 2008.

The Taiwanese currency and the Singapore dollar are the biggest gainers among Asia’s 10 most-traded currencies against the greenback in the past six months, advancing 8.8 percent and 6.1 percent, according to data compiled by Bloomberg.
Inflation Trouble

Investors “have more faith in the policy credibility in developed Asia,” said Sanjay Mathur, head of research and strategy for non-Japan Asia in Singapore at Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank. “Their inflation is not that high.”

Bank Indonesia boosted its benchmark interest rate by 25 basis points, or 0.25 percentage point, to 6.75 percent on Feb. 4, the first increase in more than two years. Policy makers refrained from raising rates again on March 4. Consumer prices in Southeast Asia’s largest economy increased 6.8 percent in February from a year earlier. Inflation was 4.3 percent that month in the Philippines.

Bangko Sentral ng Pilipinas has kept its overnight borrowing rate at a record-low 4 percent since 2009. Governor Amando Tetangco said on March 2 the Philippines has less scope to keep borrowing costs at the same level.

Western Asset favors Singapore and Hong Kong bonds, said Rajeev de Mello, who helps oversee $469 billion as head of Asian investment in Singapore at the Pasadena, California-based fixed- income unit of Legg Mason Inc.

Singapore Stable

Hong Kong and Singapore will do well,” said de Mello. “Asia is still viewed pretty much as a safe haven from a number of other regions. For countries which depend significantly on oil imports that is a challenge and will cost them in terms of growth and policy flexibility.”

Singapore is the only Asian country given the highest investment-grade rating by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Hong Kong has a AAA rating from S&P, the top ranking, while the agency rates Taiwan’s debt AA-, its fourth-best investment-grade rating.

“I like Singapore because it’s very stable among Asian countries, including their currency,” said Hideo Shimomura, who helps oversee the equivalent of $73 billion as chief fund investor in Tokyo at Mitsubishi-UFJ Asset Management Co., a unit of Japan’s biggest bank. “They have credibility among investors in their policies and probably will be able to cope well with oil inflation.”