No repeat of taper tantrum expected in Asia when Fed raises rates

Rajeev De Mello

Rajeev De Mello

Head of Asian Fixed Income

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How likely is it that we will see a repeat of the “taper tantrum” market volatility of 2013 when the Federal Reserve (Fed) starts raising interest rates?

I don't think markets will do something similar to what we saw in 2013 for two reasons:

  1. The market is generally much better prepared now. There has been a lot of talk since 2013 and investors around the world have scaled down their positions since the so-called “taper tantrum” that occurred when the Fed announced its plan to start reducing its asset purchase programme.
  2. More importantly, policymakers in the region have reinforced the stability and strength of their countries in case they face another sudden capital exit.

What measures have Asian countries taken and will they be effective?

Countries have taken various measures to improve the stability of their economies, such as increasing taxes, reducing subsidies, freeing up markets and increasing currency reserves.

Will Asian fixed income markets benefit from the fall in the oil price?

Oil is very important for Asia. Asia consumes a lot of oil per unit of GDP produced. So, the lower the oil price is better for most countries across the region.

The lower oil price helps keep a lid on inflation. It also means that countries can take advantage of cheaper oil prices to reduce subsidies.

That will continue to be positive as the lower oil price filters through to the cost of goods such as food, the price of which is impacted by production and transportation costs.

How has diverging monetary policy between the likes of the US, Europe and Japan impacted Asian markets?

The yen has weakened significantly, which impacts countries that compete closely with Japan. South Korea, for instance, competes in the auto, electronics and ship-building sectors.

A weaker yen means that South Korea is less competitive compared with Japan and that has put a lot of pressure on South Korea.

We have not seen the impact yet because South Korea still has a very significant trade surplus with the rest of the world, but there are concerns from South Korean policymakers about the impact of the weaker yen.

Which countries in Asia are more insulated from a Fed rate rise?

Countries which have been running trade surpluses are naturally a bit more protected.

South Korea, for example, boasts a strong trade surplus, but there are other countries in the region such as Thailand and Taiwan, which I think would also be quite well insulated.

How will Asian markets react to a stronger dollar?

Generally Asian currencies have not fallen very far against the dollar over the last 12 months.

There is more concern about what happens in the future if the dollar strengthens; expectations are that investors will be more cautious about investing in Asia.

There are worries too from corporates which have issued bonds in dollars, because their dollar liability will continue to go up as the dollar appreciates against Asian currencies.

Are we seeing a bubble in US dollar-denominated corporate debt?

Corporate bond issuance has continued at pace in Asia. $200 billion of dollar bonds were issued in 2014 and we expect something similar this year with the broadening of different sectors and industries issuing in the dollar bond market.

With US yields as low as they are and yields generally low in local currencies too, companies are terming out (i.e. extending the maturity) of their borrowing programmes.

There is, however, some caution in terms of how the companies hedge their dollar issuance.


This is a transcript of an interview that originally appeared on