The Business Times

Foreign investors continue yield hunt in emerging Asia bonds in April

Published Wed, Apr 13, 2016 · 08:49 AM
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[SINGAPORE] Inflows into the bond markets of most emerging Asian countries continued in April following the strong offshore demand in the previous month, with Malaysian bonds seeing their largest increase in almost two years.

In March, foreigners increased their holdings of Malaysian bonds by RM11.5 billion (S$3.98 billion), the biggest monthly increase since May 2014, central bank data showed. For all of last year, offshore investors cut their holdings by RM11.1 billion.

While official inflows data for April has not yet been released, prices on most Malaysian long-term government bonds have risen this month, a possible sign of continued overseas demand.

"Malaysia bonds have likely seen another month of net foreign inflows in April," said Leong Lin-Jing, investment manager for Aberdeen Asset Management in Singapore.

Some analysts and investors expect inflows into Malaysian assets to slow as local bonds begin to look pricey due to uncertainty over the appointment of the country's next central bank governor, who is yet to be announced.

Wider inflows into Asian bonds came as the US Federal Reserve kept interest rates unchanged last month and Chair Janet Yellen flagged a cautious approach to increasing them. The European Central Bank eased policy further in March, while the Bank of Japan is seen likely to adopt more monetary stimulus in coming months.

Recent easings in central bank policies globally and the prospect of more to come, notably in Asia, are likely to help keep emerging Asian bonds in demand, investors and analysts say.

"Investors' search for yields across the region is likely to intensify further," said Dayeon Hong, associate director of Asia-Pacific rates strategy for HSBC.

She says cash holdings of various emerging market bond funds still appear too high and this is likely to be deployed into some of those markets.

Indonesia is another market that has attracted inflows, which offers one of the highest yields in Asia.

Foreigners raised their Indonesian government bond holdings by 7.3 trillion rupiah (S$747.43 million) in the first 11 days of April after an 18.3 trillion rupiah increase in March, government data showed.

While Indonesian bonds have higher yields than their Malaysian counterparts, they come with added risks as well, investors say.

"When we compare the absolute level of interest rates on local bonds, Indonesia is more attractive as it has the higher carry ... however, this does come with higher FX volatility," said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments.

Aberdeen's Mr Leong said Malaysian bonds generally attract more foreigners than Indonesian bonds, because they are included in most fixed income benchmark indices and have better market liquidity.

"Furthermore, valuation at this juncture sees Malaysia being more attractive than Indonesia, especially on a currency hedged basis given how high hedging costs can be in Indonesia," Mr Leong said.

South Korea has also seen more bond inflows with the won stabilising last month. The won jumped 8.2 percent in March, emerging from four consecutive months of decline to show its biggest monthly gain in seven years.

Offshore funds bought a combined net 1.8 trillion won (S$2.11 billion) worth of domestic bonds in the first 12 days of April, according to preliminary data from Financial Supervisory Service.

That compared with 570 billion won worth of bond inflows in March after the country suffered outflows of 4.2 trillion won in February.


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