Foreign inflows into Asian bonds rose for a seventh consecutive month in July, albeit at a slower pace, with analysts saying investments in the region's debt have become less rewarding after Asian currencies reached a peak against the dollar. Data from central banks and local bond market associations in India, Indonesia, Thailand, Malaysia and South Korea showed foreigners bought $5.5 billion in these bond markets in July, which is the lowest in four months.
"Asian currencies have done quite well against the dollar," said Chang Wei Liang, FX strategist at Mizuho Bank. The strong performance meant the potential for additional returns from currency appreciation were limited, unlike in the past, he said. Malaysian bonds saw outflows for the second consecutive month in July, triggered by investor concern over the state fund 1Malaysia Development Berhad's (1MDB) inability to pay debt to Abu Dhabi's government-owned International Petroleum Investment Co (IPIC).
1MDB failed to make a payment of about $600 million due by July 31 to IPIC, though it said it had remitted the equivalent of $350 million. Indonesian bonds attracted inflows of $374 million in July, the lowest in the year, while South Korea and Thailand bonds saw higher inflows of $2.4 billion and $275 million, respectively.
Inflows into Indian bonds totalled about $3 billion in July, below the $3.9 billion in the previous month. Analysts expect foreigners to slow their investments in the Indian debt market in coming months as they are close to hitting statutory investment limits.
"Investment in Indian government bonds (IGBs) as of end-July stands at 2.273 trillion rupees which, based on our estimates, creates room for an inflow of only 305 billion rupees until March 2018." said Nomura in a report. "Given limited available space for foreign portfolio investors to invest over the remainder of the fiscal year, we expect debt flow momentum to slow relative to inflows observed over the last few months."
Nonetheless, some analysts are betting on continued foreign flows into the region as the world's major central banks adopt a more patient approach to withdrawing stimulus and tightening policy. "As long as global inflation remains soft, prompting major central banks (FED, ECB etc) to normalise their monetary policies only on a gradual manner, I do not see substantial outflows in Asia bonds," said Edward Ng, fixed income portfolio manager for Nikko Asset Management in Singapore.
Federal Reserve policymakers appeared increasingly wary about recent weak inflation and some called for halting interest rate hikes until it was clear the trend was transitory, according to the minutes of the US central bank's last policy meeting. Also the yield margin for investors buying Asian bonds over U.S treasuries has come down recently.
Over the past three months, the yield spread of Indian 10-year government bond over 10-year US Treasuries has fallen by 28 basis points, while the yield spread of Indonesian bonds has fallen by 11 basis points. And even 10-year government bonds in South Korea, where geopolitical risks have heightened over North Korea's aggressive approach to building nuclear weapons, offer just 10 basis points spread over US Treasuries.
"I don't think you are being rewarded adequately for the risk profile" said Rob Carnell, head of research at ING in Singapore, referring to the region in general. He said as long as the yield spread is positive and investors maintain a negative view on the US dollar, foreign inflows can be expected to continue in coming months. "But if volatility does pick up a bit, then the volatility adjusted return will make that pick-up look insufficient."
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