Foreign investors remain buyers of East Asia bonds

FOREIGN investors remain keen buyers of East Asia bonds despite the strengthening US dollar, said the Asian Development Bank (ADB) on Tuesday.

Foreign investor interest in local currency (LCY) government bonds remained upbeat in a number of markets in Q1 2015 despite the US dollar gaining strength against most of the region's local currencies, it said.

"Emerging East Asia's bond markets continued to be broadly stable despite rising global concerns over the possibility of a Greek debt default and an interest rate hike in the United States," said the ADB in its latest bond report.

Net foreign capital flows into emerging East Asia's LCY bond market have been positive since the start of the year, the report said.

Among the four markets providing data on capital flows, Malaysia recorded the largest net inflows year to-date, as investor appetite for ringgit-denominated securities significantly improved in March and April.

South Korea also saw a notable rise in capital inflows from foreign funds in March.

In Indonesia, while foreign capital flows remained positive year-to-date, capital flows turned negative in March after strong inflows in January, and before recovering in April.

Foreign capital flows into Thailand's bond market have been volatile in 2015, although they have been net positive year-to-date.

The share of foreign holdings in Indonesia and Malaysia continued to rise, with more than one-third of government bonds in both economies held by foreign investors.

Year to date, the rupiah and ringgit are the worst performing Asian currencies against the US dollar, down 6.9 per cent and 6.3 per cent, respectively, said Commerzbank.

In Indonesia, foreign investors were the largest investor group in the LCY government bond market, with holdings climbing to 38.6 per cent at end-March. This was up from a share of 38.1 per cent at end-December, but down from a high of 40.2 per cent at end-January.

Foreign funds continued to chase yields in the Indonesian LCY government bond market, which offers the highest yields in the region.

Recently, however, the Ministry of Finance said that it aims to reduce foreign holdings of bonds to a 30 per cent share to manage the stability of the rupiah.

Foreign investor holdings of ringgit-denominated government securities inched up to 33 per cent at end-March.

Most investors had already priced in negative developments in Malaysia's LCY bond market, including the risk of a credit rating downgrade, declining international reserves, and a depreciating currency, the ADB said.

"Most investors are weighted towards the long-end of the yield curve as oil prices are expected to recover and benign inflation indicates that Bank Negara Malaysia will maintain its current monetary policy stance for the rest of the year," said ADB.

Meanwhile, the corporate debt holdings of foreign investors in Q1 2015 remained minuscule compared with their holdings of government bonds, the report said.

Foreign holdings of corporate debt in Indonesia accounted for only 10.5 per cent of the total corporate bond stock at end-March, while the share was a negligible 0.3 per cent in South Korea.

LCY bond issuance in emerging East Asia totalled US$924 billion in Q1 2015, down from US$1,032 in Q4 2014 but up from its level in Q1 2014.

The region's three largest bond markets are China, South Korea and Malaysia.