Foreign investors continued to retreat from Asian bonds for the third consecutive month in October, driven by a rise in US Treasury yields and heightened geopolitical tensions in the Middle East.
According to data from regional regulatory authorities and bond market associations, foreigners offloaded a net total of $761 million in bonds from Malaysia, Indonesia, South Korea, India, and Thailand. This outflow follows approximately $3.58 billion in net sales the previous month.
Indonesian bonds bore the brunt, with foreign net selling reaching $800 million, albeit a 47 percent decrease from the $1.5 billion in disposals seen a month earlier.
Malaysian and South Korean bonds also faced sell-offs, with investors pulling out $538 million and $515 million, respectively.
Conversely, Indian bonds bucked the trend, attracting about $767 million from overseas investors, the seventh consecutive month of net inflows. Thai bonds also experienced a resurgence, receiving net cross-border inflows of $325 million after two months of consecutive outflows.
“The main driver was higher US bond yields which threatened to break above 5 percent , with a brief period of geopolitical risk aversion due to the Israel-Hamas war,” said Khoon Goh, head of Asia Research at ANZ.
US Treasury yields have, however, retreated this month, and hovered near two-month lows on Thursday after weekly jobless claims rose more than expected, helping cement expectations the Federal Reserve will not feel pressure to raise interest rates again to slow inflation.
“If US Treasury yields are capped, with US 10y appearing to face difficulty in sustaining a move above 5 percent , it would provide much needed relief for EM Asia assets,” said Mitul Kotecha, an EM strategist at Barclays in a note.
The steep decline in US Treasury yields since the start of November continued on Friday with those on the benchmark 10-year note briefly falling to a two-month low before inching higher.
Yields have nosedived since touching 16-year highs of 5 percent in late October following a string of economic data that suggests inflation is cooling, boosting market expectations that the Federal Reserve is done with its rate hiking cycle.
The Bloomberg Global Aggregate Bond Index seen as an industry benchmark for bond market returns, was up 1.7 percent on the week through Thursday and gained 0.03 percent for the year. The broad bond market has fallen in each of the last two years as yields have climbed from historic lows during the coronavirus pandemic.
Futures markets are now pricing in a 28 percent chance the Fed cuts benchmark rates at its March meeting, up from a 7 percent chance seen a month ago when the US economy was coming off the heels of the fastest growth of any quarter in two years.
Since then, cooling consumer inflation and higher-than-expected jobless claims this week have pulled yields sharply lower.
“The markets are jittery and any movements in inflation numbers are going to have an outsized reaction,” said Sweta Singh, a portfolio manager at City Different Investments. – Reuters
