The Asian consequences of the taper

From the FT two days ago:

Mr Bernanke’s first mention of tapering in May sent debt markets worldwide into a tailspin. But Asia was in many ways the worst-hit region.

Having broken full-year records for junk bond issuance by mid-April, the market froze abruptly, and remained largely closed for two months. New high-yield deals raised $3.7bn in May but just $176m in June, according to Dealogic, while monthly investment grade corporate bond volumes more than halved.

Chinese companies – which had been the main source of issuance this year – have been notably absent in recent months. No mainland-based borrower has tapped the dollar or euro bond markets since May 22, the day of Mr Bernanke’s remarks, while the market for new offshore renminbi bonds has been suffering from its longest ever barren spell.

The problems have not been confined to China. Indonesia’s sovereign bonds offer the clearest example of the change in attitudes towards Asian credit. In April this year, the country raised $3bn in 10-year debt with a coupon paying just 3.5 per cent, a record low. When it returned to the market two weeks ago, it sold $1bn of bonds with the same duration at a yield of 5.45 per cent. In that time the spread paid above US Treasuries had jumped from 1.76 per cent to 2.87 per cent.

Fund flows have played their part. June saw record outflows from emerging market fixed income funds, according to data from EPFR, forcing many to cut positions. Rising concerns about China, which late last month saw its worst interbank liquidity crunch to date, also sapped demand.

But Mr Bernanke’s comments have been by far the most important factor…

Again, I don’t wish to endorse the “we have created bubbles” argument as it is usually stated.  Still, those are not the results I had expected and I am seeing this data being more or less ignored by the corners of the economics blogosphere which I live in.

Here are some signs that Asian debt markets are stirring back to life.


Not sure how to interpret this, but it may be fairly explicable.

In April, based on the numbers cited, Treasuries were twice as expensive as Indonesian sovereign bonds (yield of 1.74% vs 3.50%).

Since then, the price of Treasuries has fallen by one-third ( 1.74% / 2.58% - 1 ), while Indonesian sovereign bonds have fallen by only 26% ( 3.50% / 5.45% - 1 ).

So now, Treasuries are about 2.1 times as expensive as Indonesian sovereign bonds (yield of 2.58% vs. 5.45%).

It's not clear to me what we would expect happens to the price of a 'normal' good when the price of a 'superior' good drops. Maybe the act of facing up to the prospect of tapering earns the US some 'cred' here.


That is how I see it, in relative terms I place more weight on Asia driving events.Bernanke isn't all powerful and the credit crunch in China is going to happen no matter what Bernanke does.

For there to be a credit expansion the money has to come from somewhere. The chinese have been doing their best to expand lending, along with everyone else. Throw in the mess that is the chinese banking system. It is interesting that it was a comment from Bernanke that prompted a massive repricing in the market. What effect on the upside is due to the actions of the Fed amplified in a similar way?

Macro has always had trouble with the nuts and bolts of it's grandiose statements. Here we are seeing a real time example. In the scheme of things, the $80 billion or so that made up the QE is a pittance. I suspect that the Fed is careful to maintain it's aura of omniscience and omnipotence by looking like it ahead of what is already happening. The question then is what happens in the market on a nuts and bolts level when the Fed says or does something?

It's not a bubble, it's life support.

It isn't life support- it is embalming.

This is a Clear Example of how the Incentives/ Disincentives of QE Plus a Reinforcing Stimulus work. They target Corporate Bonds/ Loans to Businesses.

NGPLT. The markets are begging for it.

Low interest rates can reflect tight monetary policy, as Friedman talked about. And QE doesn't make much of a dent because without changing the LT target, it's the difference between giving someone $1000 vs telling him he has to pay it back in a year -- everyone knows the effects are short-term so they behave that way. The 2% target (plus the Fed's willingness to miss low) still dominates.

The Fed needs to remember it has a dual mandate, and avoid the decades of mistakes BOJ made.

I'm not the only person who forgot "Tapir" is spelled with an I, and got really confused at the beginning, am I?

Although, now that I think about it, what ARE The Asian Effects of the Tapir? This should be investigated.

I have got all my fingers crossed, arms cross, legs crossed, some of my toes crossed…. awaiting the upcoming FOMC decision.

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