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Asian bonds attract inflows despite solid dollar, Brexit risk

[SINGAPORE] Foreign funds flowed into most Asian bond markets in April as investors sought higher yielding assets, shrugging off Brexit risks and a strengthening US dollar.

Some Asian countries, such as South Korea, have continued to attract foreign demand for their debt this month, even as solid US economic data supported the lure of dollar-denominated assets.

Top Federal Reserve officials have voiced support for more rate hikes with Atlanta Fed President Dennis Lockhart saying he still expects two to three rate increases between now and December.

Appetite for higher yields in Asia remains firm even as Britain's June referendum on whether to stay in the European Union looms as a major geopolitical risk for markets.

While a Bank of America Merrill Lynch fund manager survey showed Brexit was seen as the biggest near-term tail risk, a majority of investors think an exit is unlikely.

"Short-term weakness on inflows is plausible but as long as the Fed hike path is gradual and Brexit is orderly, we think that inflows into Asia can continue," said Edward Ng, Asian fixed-income portfolio manager at Nikko Asset Management in Singapore.

Foreign investors added 20.1 trillion rupiah (S$2.07 billion) to their holdings of Indonesia's government bonds in April, data from the country's finance ministry shows, the largest inflow since June 2015 However, so far this month, foreigners have been net sellers as they take profits on Indonesian bonds.

Standard & Poor's, which raised its outlook on Indonesia's speculative-grade sovereign rating to positive from stable last year, is expected to announce the results of its rating review for the country this month. Other ratings agencies Fitch and Moody's have already given Indonesia an investment grade.

"If Indonesia were to be upgraded then there would be a whole category of investors who have not been holding Indonesia for rating reasons, looking to access the Indonesian market,"said Manu George, senior investment director, fixed income for Schroders in Singapore.

Malaysia reported bond inflows of 6.2 billion ringgit (S$2.07 billion) last month, slowing to about half of March's inflows as concerns over troubled state fund 1Malaysia Development Berhad (1MDB) grew on the fund's recent bond defaults.

But most government bond prices have risen so far this month, indicating that foreigners may not be overly worried.

KOREA RATE CUT BETS

South Korea's bonds saw continued inflows as foreign investors searched for capital gains on expectations of a central bank rate cut in June.

Foreign investors added 631 billion won (S$740.9 million) to their South Korea's bond holdings in April, Financial Supervisory Service (FSS) data showed.

In the first 17 days of May, foreign investors bought a combined net 2.1 trillion won, according to a separate FSS preliminary data. Such strong demand pushed treasury bond yields to record lows earlier this month.

However, Schroders' George said an actual rate cut could ultimately spur investors to seek higher yields in other Asian countries.

"If you have a positive view on Asian markets in general you'd rather buy Indonesia at close to 7.5 per cent or India at just 7 per cent rather than Korea if you're just looking at yield," he said.

"I would think foreigners, following a rate cut, would probably start unwinding some of their positions in Korea," Mr George said.

India saw US$967 million bond inflows last month after the central bank allowed foreign investors to buy up to 275 billion Indian rupee (S$5.66 billion) in additional sovereign debt.

REUTERS