Should Asian currency hedging costs "dive," should bond investors get on board?

The falling cost of currency hedging in various Asian countries has sparked debate among bond investors: whether they should strengthen their portfolios through cheap protective measures or give up the opportunity. The three-month forward implied yield of the US dollar against the South Korean won has dropped to around 1.7% this week, the lowest level in over two years, indicating a significant decrease in hedging costs for Korean bonds. According to Bloomberg's calculations, similar indicators for currencies in Thailand, Indonesia, China, and India are also below the average level for the past year. As US policy shocks and de-dollarization concerns intensify market volatility, the cost of currency hedging is decreasing for investors financing ACR HOLDINGS in US dollars. However, risk-taking investors may also anticipate a further decline in the US dollar, as this would increase the returns on their local currency assets. The hedging costs in emerging markets in Asia have decreased over the past year. Frances Cheung, Director of Foreign Exchange and Interest Rate Strategy at Oversea-Chinese Banking Corporation, said that investors holding US dollars or euros are more willing to invest in Asia's local currency fixed income products with currency hedging functions. She added, "After hedging, a large amount of foreign capital flows into China's negotiable certificates of deposit. Even if the return after hedging narrows further, funds may still flow in if the goal is diversification." Stephen Chiu, Chief Asia Foreign Exchange and Interest Rate Strategist at Bloomberg Intelligence, said, "Reduced hedging costs or higher yields will continue to be favorable factors for local currency government bonds in Asia, with Chinese and Thai bonds being the most attractive." He added, "Hedging costs have decreased as US front-end rates remain high, while Asian front-end rates have declined due to easing expectations." So far this year, the central banks of Indonesia, India, Thailand, and South Korea have collectively lowered their benchmark interest rates by 175 basis points, while the US Federal Funds Rate has remained unchanged during the same period. The decrease in forward implied local currency yields relative to US rates is making it cheaper for US investors to short Asian currencies and go long on the US dollar to hedge the potential foreign exchange losses in their bond portfolios. The Bank of Korea on Thursday cut its policy rate as expected by 25 basis points, while suggesting the possibility of further rate cuts in the future, which could further reduce hedging costs. May inflation data to be released early next month in Thailand, Indonesia, the Philippines, and South Korea will also set the tone for the currency policies and hedging costs in these countries.