DBS: Trade tensions are dominating currency and bond markets

Most of Asia’s currencies lost ground this week, stuck between the rock of U.S.-led increases in global trade tensions and the hard place of a “mildly hawkish” U.S. Federal Reserve interest rate outlook, DBS said in a note on Friday.

“Although protectionism has yet to dampen the global economic outlook, it has started to incrementally weigh on business and investor sentiments,” DBS said.

The bank noted that even as the Fed has been building a case for a steeper interest-rate hiking path in 2019 and 2020, the market isn’t convinced, with U.S. yields failing to revisit February highs.

But DBS said to still watch out for further market volatility, adding that it didn’t really expect U.S. yields to follow the Fed’s guidance higher.

“Even if the current sabre-rattling from the U.S. and China is a prelude to negotiations, further volatility is to be expected as trade tensions simmer,” DBS said. “On balance, this suggests that U.S. yields will be temporarily depressed.”

It expected 10-year yields would hover just above the key technical level of 2.80 percent, with the 30-year bond likely to also see downward pressure to around the 3 percent level, from February’s 3.22 percent peak.

DBS said Asia’s bonds would likely underperform U.S. Treasurys amid the risk-off environment.