Global demand jumps for emerging Asia bonds on rate-cut bets, FX

[HONG KONG] Global investors are extending their purchases of sovereign bonds in emerging Asia on rate-cut wagers and stronger local currencies.

Foreign funds bought US$2.9 billion in Malaysia conventional government bonds in May, according to Bank Negara Malaysia’s latest data, the largest monthly inflow since October 2013. Their purchase of a net US$652 million of listed bonds in South Korea on Jun 5, marked the longest buying streak in more than two years, according to Financial Supervisory Service data.

The inflows came as most emerging-Asian currencies strengthened this quarter, buoyed by an extended decline in the US dollar due to waning US exceptionalism and de-US dollarisation concerns. Growing expectations of lower borrowing costs in the region are also aiding bond sales, with issuers racing to secure financing ahead of any further wobbles in global markets.

Traders are increasingly betting that Malaysia, South-east Asia’s last holdout against interest rate cuts, will finally pivot to boost its economic growth amid trade uncertainties. The Bank of Korea cut benchmark rates by 25 basis points at May-end, while signalling more policy easing as US trade tariffs hit growth.

Global investors have also poured US$1.7 billion and US$2.1 billion, respectively, into Thailand and Indonesian bonds since April, putting them on track for their largest inflows in at least three quarters. The demand has driven sovereign yields lower, with Thailand’s 10-year benchmark falling to the lowest in nearly four years, while the similar Indonesia note is hovering close to a low in November.

In South Korea, clarity over the political landscape is also lifting the prospect for the country’s assets after months of leadership vacuum. This, in tandem with the forthcoming addition into FTSE Russell’s World government Bond Index are buoying demand despite lingering concerns over additional debt supply to fund President Lee Jae-myung’s fiscal spending plans.

The benchmark Kospi Index climbed almost 2 per cent on Monday (Jun 9), leading gains in Asia, while Malaysia’s main stock index rose by as much as 0.3 per cent. Global trade optimism was buoyed on Monday as top trade officials from US and China are set to hold fresh talks in London. BLOOMBERG