。 FIXED INCOME ● RATES14 February 20192Top trades Table 2. New strategiesEntry date Entry level Target Stop Current P&L RationalePayRecNew Zealand NZD5yr5yrIRSAustralia AUD5yr5yr IRS7-Feb-19 13bp 38bp 0bp 19bp +6bp Rationale: Relative macro mix; higher rate sensitivity inAustralia. Risks: Compression trades continue to be popularBuySellJapan 10bp OTMJPY3mX10Y payerswaptionATM JPY3mX2Y payerswaption1-Feb-19 7 cents 40 cents -10 cents 9 cents +2 cents Rationale: JPY curve appears too flat. Risks: Furtherflattening of JPY swap curve led by the front-endSource: HSBCNote: Options may result in greater losses than equivalent trades should the market move against one’s expected directionTable 3. Review of positions opened in previous publications Instrument Entry date Entry level Target Stop Current P&L RationaleLongMalaysia MGS3.733 Jun’28 21-Jan-19 4.07% 3.9% 4.20% 3.96% +11bp Rationale: Rebound in oil prices; cheap valuations versus therest of maturity segment. Risks: Any slippage to fiscalconsolidation planRec Singapore SGD5yr IRS 21-Jan-19 2.07% 1.80% 2.20% 2.03% +4bp Rationale: Sufficient liquidity in the market. Risks: CurrencyweaknessThailand THB5-2yr NDIRSsteepenerKorea KRW5-2yr NDIRSflattener21-Jan-19 19bp 40bp 5bp 20bp +1bp Rationale: Thailand curve is unlikely to invert with increasingduration of outstanding bonds.Risks: Lower US rates orsudden switch in monetary policy stance by Bank of ThailandBuySellAustralia TCV3 Oct’28ACGB2.75 Nov’2817-Jan-19 46.5bp 34bp 52bp 42bp +4bp Rationale: Attractive valuations and supply factors. Risks:Deterioration in state revenue outlookPayRecIndia 5yr INR ND OIS2yr INR ND OIS11-Dec-18 8bp 40bp 0bp 9bp +1bp Rationale: Long-dated ND OIS rates need to reflect higher riskpremium; intensifying expectations of policy accommodation.Risks: Further policy tightening.RecPayOffshore China CCS3yr IRSCCS2yr IRS21-Nov-18 2bp -20bp 10bp 8bp -6bp Rationale: Seasonal pressure on the renminbi. Risks: The endof the global USD rally.Long Indonesia IndoGB5.625May’233-Oct-18 8.00% 7.20% 8.50% 7.72% +28bp Rationale: BI is near the end of the tightening cycle and ratecuts possible in 2019. Risks: Global risk asset sell-off.Rec Japan USDJPY 3yr basis 27-Sep-18 -39bp -55bp -30bp -40bp +1bp Rationale: Increase in Samurai bond related liability hedging.Risks: An indication of departure from ultra-loose monetarypolicy by the BoJRec China CNY5yr NDIRS 18-Apr-18 3.55% 2.30% 3.00% 2.77% +78bp Rationale: Slower economic growth, and more monetaryeasing. Risk: Large fiscal stimulus.Buy China 10yr CGBs 14-Mar-18 3.86% 2.70% 3.40% 3.08% +78bp Rationale: Slower economic growth and slower pace of financialdeleveraging. Risks: Currency weakness or higher US rates.Open: Unrealised P&L: +206bp Closed: Realised P&L*+58bp Aggregate: Total P&L +264bp*Total P&L on closed positions since December 2018.Source: HSBC. Note:Options may result in greater losses than equivalent trades should the market move against one’s expected direction 3FIXED INCOME ● RATES14 February 2019It may seem an exaggeration to suggest that there is a race for rate cuts across Asia Pacific but thedirection of policy is increasingly clear. The market is already beginning to shift to price in a collectiveeasing bias, led in particular by China and India (Figure 1). Aside from the PBoC’s 100bp RRR cutsin January, which follows on from the easing trend last year, the first out of the block so far this yearto reverse the tightening course of 2018 has been the Reserve Bank of India with an unexpected ratecut and the prospect of another as soon as April (India: RBI eases, more to come, 7 February 2019).This would represent a reversal of the two rate hikes delivered in June and August 2018, when EMsentiment was adversely affected by external factors, in particular the Fed’s tightening. Bring thatforward to this year, the prospect of a protracted Fed pause and even an end in sight to quantitativetightening are providing policy relief in Asia. Moreover, economic activity and inflation are softeningacross the region (Asia Economics Quarterly, 4 January 2019). Although it is noteworthy that coreinflation remains elevated at 5.4% in India.Those that have a tightening bias, such as the Bank of Korea and Bank of Thailand, may have toreconsider. With inflation fleeting with the central bank’s target of 2% in Korea and nudging up to thebottom of the inflation band of 1-4% in Thailand as recently as Q4 2018, both countries have sinceseen prices decelerate sharply to only 0.8%yoy and 0.3%yoy, respectively. Lead indicators includingeconomic activity suggests that there are further disinflation pressures which also resonates withmajor developed countries and China. The Thai Baht has also appreciated the most versus Asiapeers year-to-date, which is another factor that limits room to manoeuvre for any further policynormalisation. The 6-month THB fix is already close to the policy rate, in part also driven byincreased T-bill sales and pressure might return to 2017 policy tools to alleviate FX appreciationKey direction Regional central banks are tilting more dovishly Easing expectations should rise further, though the pace of actualeasing is likely to vary significantly China and India to lead the packAndr de Silva, CFA Head of Global EM RatesResearchThe Hongkong and ShanghaiBanking Corporation Limitedandre.de.silva@hsbcib+852 2822 2217Figure 1. Easing bias reflected across APACFigure 2. Strong disinflation impulses return Source: Bloomberg, HSBC *For CNY, 1Y1Y IRS – 1Y IRS is used as a proxySource: Bloomberg, HSBCThe prospect of a protractedFed pause and even an endin sight to quantitativetightening are providingpolicy relief in Asia-100 -50 0 50 100 150 200 250 300 AUDNZDINRMYRKRWCNY* Max (-6mts)Min(-6mts)Current 12mim plie d p oli cyrat e c han ge(bp ) 0 1 2 3 4 5 6 7 8 Jan-18Apr-18Jul-18Oct-18Jan-19 CP I (% y-o -y) KRWTHBMYRINRIDRPHPFIXED INCOME ● RATES14 February 20194pressure. All things being equal, this could result in the 6-month THB fix trading well below the policyrate regardless of the prospect of a rate cut. In Korea, according to the FRA-CD curve, the market isalready pricing in a 36% chance of a 25bp rate cut by BoK within nine months. We therefore prefer tomaintain THB5-2yr NDIRS steepener against KRW5-2yr NDIRS flattener. The People’s Bank of China has been charting its own course of policy easing, irrespective ofthe Fed, for over 12 months now and we have been consistently positioning for a furtherincrease in liquidity provisions and lower China rates. Rather than recommend anycorresponding curve trade, even if we see the prospect of an acceleration of monetary easing,we have greater conviction for our well-established receive CNY5yr NDIRS and long 10yr Chinagovernment Bonds (Figure 3). In contrast, we advocate INR5-2yr NDOIS steepener not justbecause there is a good chance of a back-to-back reduction in the RBI’s repo rate but with coreinflation remaining sticky, a deteriorating fiscal outlook and rising bond supply are likely to leadto a higher risk premium in long-dated INR rates.After prudently raising rates by 175bp last year, the case for Bank Indonesia to remove some of thistightening as external pressures ebb should be more compelling, considering that inflation hasremained subdued (page 3, Figure 2). Price pressures, in particular food, have been well containedby effective supply-side management. We maintain a preference for 5yr IndoGBs with the interestrate cycle already peaked and even chances of policy easing.Encouragingly, despite a rapid fall in inflation in the Philippines, the Bangko Sentral ng Pilipinas hasso far refrained from cutting its RRR. We do though envisage a series of RRR cuts to materialise andHSBC Economics expects a 100bp cut in Q2. The local government bond market has already ralliedsignificantly, especially versus regional peers. It is therefore difficult to chase yields lower and weadopt a neutral stance (page 15). In a similar vein to the F