ANALYSIS – Global rate volatility is forcing investors to rethink Asian bonds


By Stanley White and Andrew Galbraith

TOKYO / SHANGHAI, May 6 (Reuters)A break in a massive sell-off of US Treasuries and other global bonds last month gave foreign investors time to rethink their Asian holdings and move money to safer markets such as China, far away. riskier countries like Indonesia and India.

China, India and Indonesia were among the top recipients of yield-seeking foreign investment last year.

But a divergence in economic recoveries from the coronavirus pandemic, a rally in the dollar and questions over the Federal Reserve’s determination to keep U.S. rates low have forced fund managers to view some markets as safer than others. .

In addition, a surge in US yields in the first quarter of 2021, the largest since late 2016, dulled the appeal of some low-yield Asian bond markets.

“In Asia, you have countries like Thailand, Singapore and Malaysia that are now less attractive to the United States,” Leonard Kwan, emerging markets bond portfolio manager at T. Rowe Price told Hong Kong. “These are probably the markets that we are looking to get out of and turn to Treasuries.”

In March, foreign investors turned net sellers of Chinese sovereign bonds for the first time in more than two years. But asset managers remain bullish given China’s high real yields and its close links to a rebound in global trade.

The Chinese bond market saw a rare 8.95 billion yuan ($ 1.38 billion) drop in foreign investors’ holdings in March as they reduced their positions in Chinese government bonds, official data shows .

Kwan says he has continued to invest money in Chinese bonds, citing the Chinese market focused on the domestic market with low correlations with global investment and rate cycles.

Davis Hall, head of Asian capital markets at Indosuez Wealth Management in Hong Kong, believes that buying Chinese debt is “no-brainer” for Japanese, Swiss or European investors with attractive returns offsetting currency risks.

Real yuan yields, which adjust to changes in consumer prices, are above 3%. In comparison, real yields from Japan and Switzerland are below 1%, while German bunds and US Treasuries show negative real yields.

China’s efforts to curb credit growth are cause for concern, but asset managers expect the central bank to avoid raising rates and resorting to other tools that pose less risk to credit prices. obligations.

Last year’s investor darlings Indonesia and India are no longer so, however, as asset managers worry about quantitative easing and currency weakness, suggesting a shift most important allocations in the region.

Foreign investors sold $ 1.1 billion net of Indonesian bonds in February and $ 1.4 billion in March, the largest outflows in a year. They sold $ 1.8 billion net of Indian bonds in February and March, the largest outings in nearly a year.

While a 6.5% yield on its 10-year bond makes Indonesia an attractive bet, the prospects for an uneven and slow economic recovery, a high budget deficit and a faltering currency IDR = which has already lost 2.8% against the dollar this year are worrying investors.

India is not as popular with bond investors as China or Indonesia, and the risks to its economic outlook are more acute after a surge in coronavirus infections.

Hayden Briscoe, head of global emerging market fixed income and Asia-Pacific at UBS Asset Management in Hong Kong, says investors are likely to steer clear of emerging market bonds as these central banks consider to raise the low interest rates of the pandemic era.

“Right now you have some issues,” Briscoe said. “You have the rates going badly for your rate volatility in the US and then you have the dollar on the stronger side now. It’s time to be wary of your emerging market allocations.”

While US volatility started to ease at the end of April, it remains relatively high and investors may be more ‘idiosyncratic’ in their allocations and in assessing whether bonds pay. enough to offset the risks.

“There is always the tension of, is there enough carryover to offset the volatility?” said Briscoe.

($ 1 = 6.4828 Chinese yuan)

Actual bond yields

Asian currencies and US Treasuries

Funds move towards Asian bonds

(Report by Stanley White and Andrew Galbraith edited by Vidya Ranganathan and Sam Holmes)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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