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A Warning for (Some) Asian Bond Investors

Updated on
  • Indian, Indonesian notes favored for yields as dollar climbs
  • Quickening inflation in region adds to pressure on bonds

The strengthening of the dollar may have rattled Asian government bonds, but global funds are betting that the quest for yield will resume -- albeit selectively.

BNP Paribas Asset Management favors high yielders such as Indian and Indonesian debt but sees some outflows from Thai and South Korean notes. While Amundi Asset Management has cut exposure in other emerging markets, it has kept its Asian holdings as it monitors for changes in the region’s monetary policies.

After reeling in more than $100 billion of cash this year, Asian bonds have become a less certain proposition as the dollar gets a second wind from U.S. tax reform talks. The prospect that some central banks in the region, including South Korea and the Philippines, may raise interest rates has also spurred outflows.

“Investors are encouraged to be selective as not all central banks may toe the same line as this year,” said Anders Faergemann, a London-based money manager at PineBridge Investments, which oversees more than $80 billion in assets globally. “Following the recent backup in yields, Indonesia once more looks attractive and we also like the Indian bond market.”

Following a selloff in the past month, the yield on 10-year Indonesian sovereign debt has climbed from a four-year low to 6.65 percent. That on similar-maturity Indian securities jumped to a six-month high of 6.93 percent on Tuesday. This compares with 2.31 percent for Thai notes and 2.53 percent for South Korean bonds.

Global funds have bought more than $1 billion of Indonesian notes this month, taking inflows in 2017 to $10.5 billion. They pumped $22.7 billion into Indian debt so far this year.

Emerging Asian bonds have faced pressure in recent weeks as 10-year Treasury yields vaulted past 2.40 percent, lifting the dollar to a three-month high in late October. A Bloomberg gauge of carry trades in four emerging Asian currencies has fallen since reaching a four-year high in early September.

While Treasuries have since recouped some of their losses, some caution the rout isn’t over. Goldman Sachs Asset Management predicts that the yield on 10-year notes will rise toward 3 percent as the Fed may tighten three times in 2018 after a likely move in December. BlackRock Inc. sees the 10-year yield climbing to 2.50 percent by year-end.

Price Pressures

The stronger dollar is adding to headwinds for emerging Asian debt just as an uptick in inflation and better growth bolster the case for higher interest rates. South Korea and the Philippines are among regional central banks which are set to tighten policy in 2018, according to DBS Bank Ltd.

Higher oil prices will increase price pressures for net crude importers including Thailand and South Korea, HSBC Holdings Plc said, while saying investors should become more selective with local borrowing costs poised to rise.

“We are closely monitoring Asian central banks with regards to the monetary policy in their countries,” said Sergei Strigo, London-based co-head of emerging-market debt for Amundi Asset Management, which oversees the equivalent of $1.6 trillion globally. “We believe the environment is still supportive in some countries. We like Indonesian bonds due to the inflation dynamics, credibility of the central bank and relatively high yields of these bonds compared to Asian peers.”

Consumer-price gains in Indonesia have halved to 3.58 percent from an all-time high of 8.36 percent reached in late 2014. The central bank has eased borrowing costs eight times in the past two years, boosting the appeal of the nation’s debt, the highest yielding in Asia after Pakistan and India.

“We think there is a risk of some selling of local debt in Thailand and Korea as yields are low and potentially not appealing enough for foreign investors,” said Jean-Charles Sambor, deputy head of emerging-market debt at BNP Paribas Asset Management in London. “We see some great opportunities in local currency sovereign in high-yielding countries such as Indonesia and India though, in the short term there will be some volatility.”

— With assistance by Netty Idayu Ismail

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