Taiwan Investors Rush Into Foreign Bond ETFs Before Fed Pivot

(Bloomberg) — Taiwan investors are ramping up purchases of bond exchange traded funds as they seek to lock in higher yields before a potential Federal Reserve interest-rate cut.

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The island’s investors poured a net $6.6 billion into ETFs that track overseas bonds so far this year, the fastest inflow since Taiwan listed its first fixed income ETF in 2017. The amount accounts for more than half the total investment by Asia Pacific investors, according to data compiled by Bloomberg.

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Taiwan investors are buying bond ETFs as fading bets for deep Fed rate cuts this year push up Treasury yields, making them more attractive than local notes amid the prospect of a steady domestic policy rate this year. The premium offered by 10-year Treasuries over similar bonds in Taiwan widened to most in three months in February.

“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,” said Ryan Chang, vice president of fixed income at CTBC Investments Co. in Taipei. “Investors are hoping for price gains in addition to high yields of overseas bonds because of a possible Fed pivot.”

Chang sees the local ETF market growing to NT$3 trillion ($94 billion) this year.

Investors from other countries are also making a beeline for US debt. Total outflows from emerging markets into foreign bond ETFs amounted to about $815 million so far this year. 

In Taiwan, however, bond ETFs purchases are weighing on the local dollar, which has weakened about 2.6% against the US currency so far in 2024. That contrasts with the benchmark stock index, which touched a record high due to demand for artificial intelligence technology.

The appeal of bond ETFs makes sense because of the interest-rate differential, said Jenny Zeng, APAC fixed income CIO at Allianz Global Investors. “Banks are also buying dollars because of month-end rebalancing,” she said, adding that bond outflows from Asia may ease toward the second-half of the year when the Fed starts to cut rates.

–With assistance from Marcus Wong.

(Updates Taiwan dollar performance in the seventh paragraph.)

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