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Funds flocking to India and Indonesia to escape falling yields

Singapore

NEVER mind the trade war. A looming US interest-rate cut is set to replace tariff headlines as the key driver of developing Asian bonds, according to money managers.

As traders count down to the Group-of-20 summit this week, global funds are looking beyond the outcome to focus on an expected easing in Federal Reserve policy. Portfolio managers reason that regional central banks are likely to follow in the Fed's footsteps, and this would galvanise demand for Asian bonds.

"The good news is the high yielders - the Philippines, India, Indonesia - have central banks that hiked significantly over the last 18 months as the Fed was tightening policy," said Mark Baker, investment manager of emerging-market debt at Aberdeen Standard Investments Ltd in Hong Kong. "It's natural to look to these markets as the first places to reverse some of that tightening."

After a year dominated by haven bids, risk assets are poised to get a new lease of life, thanks to the Fed's recognition that rates may need to fall to prop up growth. Regional securities such as Indonesian and Indian debt, which offer yields that are more than three times those of Treasuries, are a standout in a global environment where US$13 trillion of bonds have negative yields.

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Rupiah sovereign bonds, which have reeled in more than US$5 billion of inflows this year, are a top pick among global funds after Bank Indonesia signalled last week it's ready to cut interest rates in coming months.

Yields on 10-year rupiah bonds are the highest among developing Asia's major debt markets, even after dropping to an almost one-year low of 7.39 per cent last week. Bank Indonesia will lower its benchmark rate by a quarter percentage point to 5.75 per cent by year-end, after delivering six hikes in 2018, according to the median forecast of analysts in a Bloomberg survey.

Finance Minister Sri Mulyani Indrawati said on Tuesday the central bank "will find the right timing" to adjust policy amid low and stable inflation, with ample room to maneuver in the second half of the year.

"Our top pick for local interest rates in Asia continues to be Indonesia, where we see scope for the central bank to ease policy by more than expected," said Abbas Ameli-Renani, a portfolio manager for EM bonds and currencies at Amundi Asset Management in London. The easier monetary policy adopted by major central banks will "encourage further inflows into EM debt as investors increasingly view EM as the oasis in a yield desert", he said.

Still, Amundi cautions that how the US-China trade row develops will be crucial for the outlook of emerging currencies, with gains likely to be cut short if an agreement proves elusive in the short term.

Similarly, PineBridge Investments warns that Asian currencies may face increased volatility, due to expected swings in the Chinese yuan, and this could pose a risk to the region's bonds.

"Selective Asia central banks may need to cut rates to help support the economic growth," said Arthur Lau, PineBridge's head of Asia ex-Japan fixed income. "This may also add pressure to the respective currencies."

Attracting interest

Indian bonds are also drawing interest amid speculation the central bank may deliver a fourth rate cut this year, after it recently shifted to an accommodative policy stance. Ten-year rupee yields dropped to 6.73 per cent last week, the lowest since 2017, as overseas investors snapped up more than US$1 billion of the nation's debt this month.

Rupee bonds are attractive as the nation is "not a major actor" in the trade war, said Aberdeen Standard's Mr Baker, adding that the money manager trimmed some of its exposure to Philippine government debt in favour of Indonesia and India.

"It's all about going risk-on in the short term at least," said George Boubouras, director at Salter Brothers Asset Management in Melbourne. "It doesn't really matter in the short term that the trade war's going on. As the Fed cuts, that's just going to buoy risk assets - investors will need to take advantage of that while they can."  BLOOMBERG

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