Foreigners cut their exposure to Asian bonds in February as a rise in US Treasury yields and fears about US trade protectionist steps undermined demand for the region's debt. Data from central bank and bond market associations showed foreigners sold over $3 billion in India, Indonesia, Thailand and Malaysian bonds in the last month, compared with purchases of about $7 billion in January.
The selloff in regional bonds came as US Treasury yields rose closer to 3 percent the last month, a level not seen since the end of 2013. "The February selloff in Asian bonds wasn't an isolated (incident) but a global phenomenon led by expectations of accelerated monetary tightening by developed market central banks, especially the US Fed," said Prakash Sakpal, ING Asia economist in Singapore.
Indonesian bonds saw the biggest foreign outflows of over $2.5 billion in February, despite some positive sentiment over its inclusion to a global index from June this year. Malaysian bonds experienced outflows of over $1 billion, after attracting inflows in the previous three months. Bucking the trend, South Korean bonds lured foreign money of over $2.5 billion as geopolitical tensions on the Korean peninsula abated last month.
After months of escalating tensions over Pyongyang's advancing nuclear and missile programmes, US President Donald Trump agreed to accept an invitation from the North Korean leader to meet by May. Thai and Indian bonds saw foreign outflows of about $500 million and $30 million respectively in February. Analysts said US trade protectionism could restrict foreign inflows into the region in coming months. Earlier this month, Trump announced he would impose hefty tariffs on imported steel and aluminium to protect US producers.
South Korea is the No. 3 steel supplier to the United States after Canada and Brazil and would be the hardest hit by the tariffs. Other Asian suppliers are Japan, Taiwan and India.
"General sentiment is likely to stay cautious amid fears of a full-blown trade war, said Christopher Wong, an FX strategist with Maybank. "But if such concerns wind down, we should expect inflows to the region to resume."