US elections and geopolitical risks hint at volatile November for Asian bonds

With less than twenty days to the US Presidential elections, markets are watching the campaign with baited breath as they await the decision of the American people. Most investors are hoping for a Biden presidency cohabiting with a Republican senate. While Biden will stabilise the broader geopolitical environment, so the reasoning goes, the Republicans will block a promised tax hike from the Democratic candidate should he win the White House in November. 

But DBS strategists Duncan Tan and Philip Wee argue that this favourable result is merely a facet of event risks for Asian bond markets. Even before the result is the long and arduous process of confirming the victors in an unprecedented Covid-19 election. Prolonged delays and contested results are expected, creating political instability that could prompt markets to enter a state of uncertainty and risk aversion come November. 

“In a mild scenario, we think it is only those bond markets sensitive to foreign capital inflows (Indonesia, Malaysia) that would see some weakness. In a more severe scenario of global deleveraging and rush to cash and USD (just like in March), the entire Asia rates complex could come under pressure,” warn the pair in a broker’s report on 14 October 2020. 

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