Massive Outflow from Asian Bonds as US Yields Surge
Asian Bonds Hit by Foreign Outflows
Asian bonds experienced significant foreign outflows in September due to a surge in US bond yields and a stronger dollar. This resulted in diminished returns for international investors. Regulatory authorities and bond market associations reported that foreigners sold regional bonds worth $3.7 billion from Malaysia, Indonesia, South Korea, and Thai markets. This outflow was the largest since June 2022.
US Federal Reserve’s Impact
Expectations that the US Federal Reserve will maintain higher policy rates for a longer duration to tackle inflationary pressures have led to an increase in bond yields in recent weeks. The yield on the US 10-year Treasury note jumped 48 basis points (bps) in the last month alone, the highest since September 2022. Furthermore, it has already risen an additional 37 bps this month.
Asian Government Bonds vs. US Counterparts
Due to the surge in US yields, most Asian government bonds are now providing lower yields compared to their US counterparts, despite higher risks. This has made foreign investors less motivated to invest in Asian bonds.
Indonesian Bonds and Rupiah
Among the affected markets, Indonesian bonds faced the most significant outflows. They experienced net sales of $1.5 billion last month, marking the largest outflow in a year. The Indonesian rupiah also suffered, hovering near a 3-1/2 year-low against the dollar. In response, Indonesia’s central bank surprised markets with a 25 basis points rate hike this week, its second such hike in 2022.
Other Affected Markets
Foreign investors also offloaded Malaysian, Thai, and South Korean bonds with respective amounts of $940 million, $786 million, and $471 million.
Indian Bonds Buck the Trend
Despite the overall outflows, foreign investors poured approximately $113 million into Indian bonds. This optimism is driven by the inclusion of Indian bonds in JP Morgan’s widely-tracked emerging market debt index next year.
Geopolitical Tensions and Risks
Analysts believe ongoing geopolitical tensions in the Middle East will add risks to foreign flows into the region. The Palestine-Israel conflict has pushed up oil prices and is likely to weigh on investor sentiment in the near term, leading to further portfolio outflows from Asian emerging markets.
