Macroscope | Federal Reserve’s coronavirus policies risk driving capital to Asia
- Investors seeking yields could flee near-zero interest rates in United States in favour of Asian government bonds and currencies
- Coronavirus-imposed shift to working from home raising interest in tech stocks and leading exporters such as China, Taiwan and South Korea
“Don’t fight the Fed.” That old market mantra is arguably as valid today as ever, especially when it is now crystal clear the Federal Reserve intends to do whatever it takes, and for however long is necessary, to restore the health of the US economy.
“We are not even thinking about thinking about raising rates,” Federal Reserve chairman Jerome Powell said on June 10. As regards a timetable for US economic recovery, “it is a long road, it is going to take time,” he continued, but the Fed “can use our tools to support the [US] labour market and the economy and we can use them until we fully recover”.
Investors seeking yields will look elsewhere. Some may be drawn to Chinese government bonds, whose portfolio eligibility has been enhanced in recent years by developments such as the renminbi’s inclusion in the International Monetary Fund’s Special Drawing Rights basket and the introduction of the bonds into several global bond indices.
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That process may have already begun. Leaving aside “a blip lower observed in the second half of March, [Chinese government bond] buying has been unequivocal”, Daniel Tenengauzer, head of markets strategy at US bank BNY Mellon, said in a report on June 11. Over the past month, the five-year yields of these bonds widened by 65 basis points to 2.5 per cent, which “is particularly attractive given that investor attention towards bloated issuance in the US and Europe is rising”.