Riding out the rise

Stakeholders in the Asian recovery have a nervous eye on the region’s central banks for signs as to when interest rates will rise this year – something that could weigh on equity returns and devalue the portfolios of bondholders. Changes in rates expectations are also leading to increases in institutional hedging activity. Harry Thompson reports

Interest rate swap curves in Asia steepened in December and January, suggesting the fixed income market has already begun to price in the possibility of rate hikes. Curves in the region, notably in Australia, moved to price in an economic recovery, which is typically a precursor to central banks raising interest rates. This is referred to as a ‘bear steepening’ of swap curves, where longer-end, five- to 10-year swap rates rise more quickly than shorter-end, two-year rates, for example