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Diminished Fed hike chance, Brexit fears draw foreigners to EM Asia bonds

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by June 14, 2016 General

SINGAPORE: Foreign investors are piling back into Asian bonds as they seek out the region’s attractive yields in the wake of waning prospects of a near-term US interest rate hike.

Growing fears the June 23 referendum in Britain could see it exit the European Union have also fed demand for sovereign debt in general, which in turn has bolstered emerging Asian paper, analysts say.

While the heightened risk aversion over the past two weeks has buoyed bonds globally, the potential capital gains from expected further policy easing in Asia and the relatively higher yields in the region remain an attraction.

““Apprehension ahead of the UK’s EU referendum vote on 23 June may be partly attributable to the latest bout of risk aversion but EM rates should remain resilient,” wrote André de Silva, HSBC’s head of emerging market rates research, in a note.

““The era of ‘yield grab’ is still firmly entrenched.”

In May, some emerging Asian bonds reported outflows on expectations a solid US economy may allow the Federal Reserve to raise interest rates in the summer. But a surprisingly disappointing May jobs data erased chances of an imminent Fed tightening.

While Brexit fears have sent global riskier assets skidding, foreign investors have bought emerging Asian bonds so far this month, especially in countries where monetary policies are expected to ease.

INDONESIA, KOREA

In the first 10 days of June, foreign investors boosted their Indonesia government bond holdings by 16.5 trillion rupiah (US$1.2 billion), after cutting 4.2 trillion rupiah last month, data from the finance ministry showed.

That came as Bank Indonesia governor Agus Martowardojo on May 25 suggested that the central bank may ease policy this week, although a Reuters poll showed a majority of economists expected it to stay pat.

Pimco’s Luke Spajic, head of portfolio management, emerging Asia, said the central bank could lower the existing benchmark 12-month reference rate by 25 to 50 basis points (bps) from the current 6.75% this year.

““To the extent that cutting rates is in anticipation of softer economic conditions, notably lower inflation, then local bonds are going to remain attractive,” Spajic said, adding that Pimco has recently increased allocation to Indonesian bonds.

Spajic expected other monetary authorities in Asia, including the Bank of Korea, to slash interest rates further. The central bank last week unexpectedly cut its key interest rate to a record low of 1.25%.

In South Korea, foreign investors bought a net 1.1 trillion won (US$938.7 million) worth of local bonds in the first 13 days of June, according to a preliminary data from the Financial Supervisory Service (FSS).

Foreigners increased their South Korean debt holdings by 888 billion won in May, the largest bond inflows in one year, a separate FSS data showed.

The country’s bond yields are lower in emerging Asia but much higher than developed markets such as Japan and some European countries, investors noted.

““We consider (South) Korea as an attractive fixed-income market to invest in as it attracts more developed market investors rather than traditional emerging market investors,” said Jens Nystedt, portfolio manager mmerging market debt team, Morgan Stanley Investment Management, in New York.

““Relative to other opportunities in developed markets, (South) Korea can still offer an attractive yield, even on a currency hedged basis, in the long end of the curve. The whole curve should ‘bull steepen’ on deeper than expected cuts.”

Nystedt also expects both Malaysia and Indonesia to cut interest rates by a total of 50bps before the year-end, which will attract bond inflows. India is also predicted to ease policy rates in coming months and lure foreign investors to the country’s debt markets, he added.

Foreign investors cut Malaysian bond holdings in May, the central bank data showed, amid concerns over state fund 1Malaysia Development Bhd. Thailand reported bond inflows last month, according to the Thai Bond Market Association. – Reuters

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