Taiwanese investors are swiftly moving towards bond exchange-traded funds (ETFs) to capitalize on higher yields ahead of a potential Federal Reserve interest-rate reduction. The surge in purchases, totaling a net $6.6 billion so far this year, marks the fastest influx since Taiwan introduced its inaugural fixed income ETF in 2017. This trend reflects more than half of the total investment by Asia Pacific investors, as indicated by Bloomberg data.
Taiwanese investors are increasingly turning to bond ETFs as they endeavor to secure higher yields in anticipation of potential interest rate adjustments by the Federal Reserve. This year alone, investors from the island have injected a net sum of $6.6 billion into ETFs tracking overseas bonds, marking the most rapid inflow since the introduction of Taiwan’s first fixed income ETF back in 2017. Notably, this influx represents over half of the total investment by Asia Pacific investors, according to data compiled by Bloomberg.
The rationale behind Taiwanese investors’ pivot towards bond ETFs stems from diminishing expectations for substantial rate cuts by the Federal Reserve this year, which have resulted in higher Treasury yields. Consequently, these yields have become more appealing compared to local notes, especially in light of the prospect of a stable domestic policy rate throughout the year. The gap between the premium offered by 10-year Treasuries and similar Taiwanese bonds widened to its largest margin in three months during February.
Ryan Chang, Vice President of Fixed Income at CTBC Investments Co. in Taipei, elucidated on this phenomenon, stating, “Insurers and retail investors are rushing to catch the final train before the Fed’s interest rate cut, so there’s a new batch of capital flowing into these ETFs in the first half.” Chang further highlighted investors’ aspirations for price appreciation alongside the attractive yields of overseas bonds, driven by the possibility of a shift in Fed policy.
Chang predicts substantial growth in the local ETF market, projecting it to reach NT$3 trillion ($94 billion) by the year’s end.
Meanwhile, investors from other countries are also directing their attention towards US debt, with total outflows from emerging markets into foreign bond ETFs amounting to approximately $815 million thus far in 2024.
However, the surge in bond ETF purchases in Taiwan has exerted downward pressure on the local currency, which has depreciated by about 2.6% against the US dollar since the beginning of the year. This stands in contrast to the performance of the benchmark stock index, which achieved a record high buoyed by demand for artificial intelligence technology.
Jenny Zeng, APAC Fixed Income CIO at Allianz Global Investors, emphasized the attractiveness of bond ETFs due to the interest-rate differential, noting, “Banks are also buying dollars because of month-end rebalancing.” Zeng anticipates a potential easing of bond outflows from Asia in the second half of the year as the Federal Reserve commences its rate-cutting cycle.
