TAIPEI: Bond traders in Taiwan aren’t an enthused lot these days amid uncertainty over the outlook for interest rates.

The average daily trading volume in government bonds fell to a six-month low of NT$5.4 billion (US$167mil) in April.

That followed the central bank’s surprise interest rate increase in March, with minutes later showing another rate hike is possible too.

The central bank wasn’t expected to break the long-held bias for low borrowing costs, and that’s spurred a dilemma about the path of interest rates, according to Societe Generale SA.

Dwindling volumes have led to lacklustre demand for government bonds in recent auctions amid a surge in yields.

“The bond market is dispirited now” as traders are still in doubt about where interest rates might go, said Tim Yu, a fixed-income trader at IBF Securities based in Taipei. “The market has no direction.”

Taiwan’s 10-year government bond yield has jumped more than 45 basis points since the rate increase in March. Bearish sentiment peaked late last month when a five-year government bond was sold at a yield of 1.63%, the highest since 2008.

A surprise easing in April’s consumer prices released Tuesday may revive bets that the central bank is done with rate hikes. But economists and officials caution that higher power bills will continue to show in the consumer price index in coming months.

Faster economic growth, fuelled by demand for artificial intelligence-related technologies, also poses a risk to inflation.

“The decent economic outlook and sticky inflation mean Taiwan’s yield curve will still see a chance of steepening,” said Gary Ng, a senior economist at Natixis SA.

“Together with the lackluster demand for bonds, it will be more costly for Taiwan’s government and businesses to finance as investors will expect a higher premium,” he said.

Trading in Taiwan’s domestic bond market is also declining structurally, falling from an annual volume of NT$5.04 trillion in 2018 to NT$1.56 trillion last year.

The recent drop in trading momentum is due to a lack of guidance and confidence in the market, according to IBF’s Yu.

“Investors with bond positions also suffer from mark-to-market losses, which discourages them from buying more,” he said.

 - Bloomberg