The spread between Taiwan’s two and five-year interest-rate swaps will narrow as the central bank raises borrowing costs more in the coming year than money markets indicate, Morgan Stanley said.
To profit, investors should make fixed payments over a two-year period and receive floating rates for 60 months, the US bank said.
The central bank will lift its discount rate by 12.5 basis points every quarter through the end of June next year for a cumulative rise of 0.5 percentage points, it said in a research note dated on Friday. Rates on three-month negotiable certificates of deposits reflect bets for increases totaling 37.5 basis points, it said.
The recommended trade will deliver returns as the gap between two and five-year swaps, at 52 basis points now, shrinks to 20 basis points, Morgan Stanley wrote. Investors must cut losses should the spread widen to 62 basis points, the report said.
The central bank on June 24 unexpectedly raised its benchmark rate to 1.375 percent from a record-low 1.25 percent, citing a recovery in exports and improvements in the job market.
The economy grew 13.27 percent in the first quarter, government data showed. GDP may rise as much as 8 percent this year after having shrunk 1.9 percent last year, the Ministry of Economic Affairs said on July 8.
Central bank Governor Perng Fai-nan (彭淮南) on June 24 said the central bank hopes to keep real interest rates in “positive” territory.
In swap contracts, two parties exchange a fixed rate for a floating payment that varies in accordance with a benchmark interest rate.
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