By Johann M Cherian, Gaurav Dogra and Rae Wee
SINGAPORE/BENGALURU (Reuters) -Bond investors fleeing the United States are finding a haven in stable and lucrative Asian debt markets, with Malaysia leading the pack as the destination for foreign money.
Foreign ownership of government bonds from Indonesia to India is soaring, becoming a tailwind for markets that have traditionally been dominated by domestic players.
“We’re in a very good environment for Asian investments,” said David Chao, global market strategist for Asia Pacific at Invesco. “The ingredients are in place for Asia, for emerging markets to outperform.”
The biggest appeal is the combination of monetary easing and currency appreciation they are offering for the first time in four years, precipitated by U.S. President Donald Trump’s policies and a weakening dollar.
Malaysian bonds recorded their biggest monthly foreign inflows since 2014 last month, around $3.15 billion. India and Indonesia also got significant inflows.
Across Asia, low inflation and policy rates at their peak contrast with the United States, Europe or Japan, where fiscal profligacy has undermined the value of long-term debt.
Subdued growth and expected rate cuts further enhance the appeal of locking in peak rates, with the potential for capital appreciation on bonds as yields decline. A weaker dollar also gives investors scope to profit from currency appreciation.
“Emerging market assets fundamentally will do well when U.S. rates are dropping, and U.S. dollar is weakening,” said Shah Jahan Abu Thahir, head of global markets for Southeast Asia at Bank of America.
“The last few years, it was the reverse…so now, anecdotally, there’s definitely some interest potentially coming back.”
BOND ALLURE
Data from regional regulatory authorities and bond market associations showed foreign investors bought $34 billion worth of Asian debt securities so far this year – the largest amount in the first five months of a year since at least 2016.
That’s just the beginning of flows into these under-owned markets, analysts said, and likely to continue so long as economies and monetary settings in this part of the world remain insulated and more stable than developed markets.
“We’re seeing this fixed income interest across the board in the bigger and small EM countries – Thailand, Philippines, Indonesia and India,” Sue Lee, head of markets for Asia South at Citi Group, said.
India has been one of the more active markets for clients, due to the string of rate cuts, she said.
Investors are positioning themselves ahead of expected rate cuts, locking in yields with the anticipation of bond prices rising as rates decline.
Malaysia, where the market remains divided on rate-cut prospects, has an edge over Thailand, where investors reckon the cycle is almost over.
Thailand had outflows of about $53.6 million in May, as investors shunned a market with one of the lowest returns in the region and hit hardest by Trump’s trade tariffs. The central bank has hinted it has limited room to cut rates further, while the government has said it wants a weaker currency. One-year bond yields are below the 1.75% policy rate.
Indonesian government bonds (IndoGBs) offer attractive yields, with a two-percentage point premium over U.S. Treasuries on 10-year IndoGBs. However, concerns over government spending and political uncertainty have tempered investor enthusiasm.
Investors say Malaysian bonds offer more value, with its central bank yet to start cutting rates despite weaker growth, and a relatively robust ringgit.
Abu Tahir said bonds in Indonesia are regarded as expensive while Thailand has rate cuts priced in and is already at fair value.
“It’s about what’s the expectation and what’s the market pricing,” he said, predicting Malaysia will cut rates in July, though the market is more divided.
“So that’s like where the value is because if everybody is expecting a cut, it’s already been priced in,” he said.
The lack of liquidity in Asian bond markets has long been a constraint for investors, with rapid foreign capital flows capable of triggering price volatility.
Last month, a rush of capital into Hong Kong caused a spike in its usually stable currency.
But analysts say there is less cause for concern, given a benign inflation environment and low foreign ownership.
“For the past five years, it’s been tumbleweed in terms of portfolio inflows into the region, so actually it wouldn’t be bad to see more inflows back into the region,” said Claudio Piron, a strategist at Bank of America.
“In a way, if it’s done in a calibrated, natural way, it may not be bad. A good problem to have.”
(Reporting by Johann M Cherian, Gaurav Dogra, Rae Wee, Vidya Ranganathan; Editing by Vidya Ranganathan and Jacqueline Wong)
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