Fed’s quantitative tightening looms over Asia

Bloomberg

Asian emerging markets were among the biggest beneficiaries of the Federal Reserve’s massive balance-sheet build-up over the past decade. So it’s tempting to conclude the Fed’s coming asset wind-down bodes ill for bonds and equities from South Korea to Taiwan.
The key gauge to watch may not be the pace at which the US central bank’s balance-sheet contracts as what happens to 10-year US Treasury yields. If those benchmark rates remain contained below 3 percent, investors may still have a twinkle in their eyes for the higher returns available outside the US.
There’s little precedent to rely on, as Fed policy makers embark again for uncharted waters, after unprecedented rounds of quantitative easing that began in 2008 and continued through 2014. For now, emerging markets continue to enjoy strong capital flows — for Thailand, the influx is so strong that officials are dusting off the toolkit to potentially limit gains in the baht.
“The US yield curve could steepen further, which would also impact local yield curves,” said Rajeev De Mello, who oversees about $11.7 billion as head of Asian fixed income in Singapore at Schroder Investment Management Ltd. “We don’t believe this announcement by itself would lead to a period of market turmoil. Investor interest in emerging markets has been strong as we would expect it to continue.” The US 10-year yield could gravitate toward 2.75 percent, he said.