Emerging market debt beckons funds after Treasury yields slump

Mumbai

A SURGE of offshore investments into higher-yielding sovereign debt in Asia is looking inevitable after the US elections.

Bets on higher Treasury yields have unwound on lower expectations of a Democratic sweep of both the US presidency and the Senate, and the prospects of a large stimulus deal. Traders have piled into Asian debt, with Indonesia's benchmark bond yields dropping more than 30 basis points in two days to the lowest since February 2018.

"EM Asia offers a very attractive investment proposition for investors in this lower-for-longer yield environment," said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments Asia.

"We see more opportunities in Asia high-yield bonds over investment-grade bonds, largely due to supply risk concerns and low absolute yield levels."

A divided US government is being touted by market watchers as a favourable election outcome for Asian assets. Lower Treasury yields mean emerging market bonds are more attractive, while a Joe Biden presidency could lead to a more conventional trade policy beneficial to the export-dependent region.

The benchmark 10-year sovereign bond in Indonesia, a bellwether for foreign interest in EM Asia, offers a yield of around 6.3 per cent, while Indian debt of a similar tenor yields 5.9 per cent. Treasury 10-year yields were at 0.82 per cent on Friday while the pile of negative-yielding debt globally rose to a record US$17.1 trillion.

"There is definitely pressure to hunt for yields," said Eugene Leow, a fixed-income strategist in Singapore at DBS Group Holdings. A divided house "with the prospect of a Biden presidency could be sufficient to prompt investors to put their money to work in underperforming EM markets", Mr Leow said.

Investors were already turning positive on Asia even before the election.

Offshore investors bought US$1.2 billion of Indonesian bonds in the current quarter, helped by a new law aimed at creating jobs in the country. That has more than reversed a selloff in the preceding two months that was driven by concerns over the central bank's debt monetisation.

Other Asian nations have also seen favourable flows as they slowly emerge from a coronavirus-induced slump. Foreign holdings of Chinese bonds surged to a record high in October while Indian sovereign debt ownership grew by the quickest pace this year. BLOOMBERG