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Investors who chased Asia's highest-yielding bonds end up last

Indonesian, Indian debt at the bottom of Aug rankings, returning virtually nothing despite real yields of at least 3%

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Haven demand hurt a number of EM assets by pushing up the US dollar, which prevented central banks from easing policy as much as they would have liked, says BOS's Rajeev De Mello.

Mumbai

ASIA'S highest-yielding bond markets provided the worst returns in August.

Indonesian and Indian debt were at the bottom of the region's rankings, returning virtually nothing despite real yields of at least 3 per cent. By comparison, Thailand's debt with real yields of just 0.6 per cent delivered the standout result. The reason for the dislocation: slowing global growth and rising trade tensions saw investors shun the debt of the less creditworthy nations, pushing down prices and incurring capital losses on investors owning them.

"If global growth expectations continue to deteriorate and negatively impact risk appetite, this is likely to undermine EM (emerging market) currencies and the bond markets which are correlated with currencies, that is high yielders like Indonesia," said Stuart Ritson, portfolio manager for emerging-market debt at Aviva Investors in Singapore. "We are being very selective in positioning in higher-yielding markets."

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Indonesia's bonds handed investors a small loss last month, even though real yields - nominal yields adjusted for inflation - offered as much as 4.04 per cent, the highest after Egypt of 47 global markets tracked by Bloomberg. A big part of the poor performance was due to selling by global funds, who offloaded a net US$281 million of the country's debt in August.

Indian bonds fared almost as badly, returning a skimpy 0.1 per cent. Escalating US-China trade tensions also spurred foreign investors to offload a net US$2.19 billion of the country's stocks.

Haven demand also hurt a number of EM assets by pushing up the US dollar, which prevented central banks from easing policy as much as they would have liked, said Rajeev De Mello, chief investment officer at Bank of Singapore Ltd. "They have seen from past episodes that rising risk premia constrains their monetary policies."

The attractiveness of the region's bonds will be tested further this week with the release of inflation data for five local markets: Indonesia, Thailand, South Korea, the Philippines and Taiwan. Annual CPI is expected to slow in South Korea, Indonesia and the Philippines, which should push up real yields and make those country' debt more attractive.

Still, the growing trade headwinds mean investors such as UOB Asset Management Ltd are shunning high-yielding debt from countries such as Indonesia.

"We reduced our weights in some higher-yielding countries," said Patrick Wacker, an emerging-market bond fund manager at UOB Asset in Singapore. We felt Indonesia may underperform despite favourable reforms, due to its commodity exposure to China, he said. BLOOMBERG