(Bloomberg) — Taiwan’s yields have scope to climb further as tight cash conditions in the local market and concerns over rising inflation dampen demand for the island’s debt, according to analysts.
Yields on Taiwan’s five-year bonds are already hovering near their highest level since 2008, while 10-year yields remain pinned close to a three-year peak.
That’s because a seasonal cash squeeze from tax payments is deepening as inflation concerns spur interest-rate hike bets, prompting investors to ditch government bonds. Compounding the liquidity crunch is a surge in loan demand from local brokerages, who are aggressively borrowing to capitalize on Taiwan’s AI-fueled stock market boom.
“There can be a mild upside risk on bond yields because Taiwan’s banking liquidity may remain less ample in the short term as AI-related loan demand remains strong,” said Gary Ng, senior economist at Natixis.
As funding dries up, Taiwan’s lenders are reducing purchases of certificates of deposit from the central bank to conserve cash. The outstanding balance of certificates of deposit issued by Taiwan’s central bank has slumped to NT$6.15 trillion ($195 billion), the lowest since June 2010. Demand for debt at auctions is also dwindling as yields on 10-year bonds were set at their highest level since 2013 last week.
Monetary officials are tracking these shifts closely. Governor Yang Chin-long said last week that bank funding from AI companies, along with tax payments and the stock investment frenzy was behind the drop in demand for bonds and CDs.
Traders are now waiting for the Taiwanese central bank’s interest-rate decision on Thursday. While the island’s rates are expected to be left unchanged at 2%, traders are watching if the monetary authority’s tone will turn hawkish after inflation crossed its alert level in May.
While domestic inflation remains hot, easing global energy pressures may give policymakers some breathing room.
The interim US-Iran pact could embolden doves at Taiwan’s central bank, analysts including Brian Tan at Barclays Bank Plc wrote in a note. However, the monetary authority is still expected to lean toward rate hikes this year, they wrote.
Some analysts see the liquidity pressure forcing a policy response.
BNP Paribas SA said there’s a possibility of a preemptive, gradual recalibration of the funding market. The central bank could guide the overnight interbank rate higher, which could help cool down speculative trading, bringing it closer to the policy rate, analysts Jeeho Yoon and Franco Hsu wrote in a note.
However, Lin Chi-chao, chief economist of Cathay United Bank Co Ltd. said higher market rates are already helping curb demand in the economy, reducing the urgency for the central bank to lift interest rates unless the funding squeeze persists.
Lin sees a low probability of yields “easily returning to their March levels,” though he noted that room for them to rise sharply from here is limited.
While liquidity concerns dominate the market, BNP expects the central bank to gradually adjust its monetary policy in the medium term to align with the higher potential growth.
It recommends positioning for a “steeper” yield curve — where the five-year yield climbs faster than the one-year rate — betting that Taiwan’s tech-driven economic growth will pull longer-term yields higher.
–With assistance from Argin Chang and Malavika Kaur Makol.
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