Signs of better news on inflation and foreign inflows are appearing for emerging Asia bonds, helping to prime the market for a recovery once the Federal Reserve turns less hawkish.
(Bloomberg) — Signs of better news on inflation and foreign inflows are appearing for emerging Asia bonds, helping to prime the market for a recovery once the Federal Reserve turns less hawkish.
Goldman Sachs Group Inc. says an improving inflation outlook would have a material impact at this stage. The latest consumer-price data for South Korea, Thailand and the Philippines came in below estimates, while some sovereign debt saw foreign money return. The repercussions of an aggressive Fed on some emerging Asia notes are also waning, analysis shows.
Any peak in inflation or rate expectations in the US may be the green light that Asia’s emerging debt markets need for a more sustained rally. An index of emerging Asia bonds has fallen about 1.4% in the third quarter so far, in line with US Treasuries. That compares with a loss of 6% in the three months ended June.
“The local dynamics are much more important a driver than before” for Asian local-currency bonds,” said Jin Yang Lee, an investment manager for sovereign debt at abrdn Plc in Singapore. “We are generally quite comfortable with extending duration on weakness in markets that have lower sensitivity to US Treasuries,” he added.
These three charts show how conditions are turning more supportive:
1. Peak Inflation
Analysts have been looking for signs of peak domestic inflation as one of the buy signals to return to bonds, with one catalyst a consistent trend of data undershooting estimates.
South Korea’s inflation is showing signs of topping out, with prices rising 5.7% in August from a year before, the first time in 10 months the figures have come in below economists’ projections. The Bank of Korea is the most advanced in the region in terms of rate hikes, and receding inflationary concerns mean it may be the first to conclude the cycle.
Similarly, August inflation in the Philippines was below estimates for the first time in six months, while data in Thailand came in below forecasts. India will release August retail inflation figures on Sept. 12.
2. Foreign bond inflows
India and Indonesia recorded net foreign bond inflows in August, their first addition in at least six months, while global funds poured into Thai debt for the first time since May.
While the bulk was mainly after the dovish July FOMC decision, the trend suggests that global funds see positives in the region such as light foreign bond positioning and more moderate policy tightening. This hints at more significant inflows if the Fed dials back.
3. Lower sensitivity to hawkish US bets
Thailand, Malaysia and Indonesia 10-year yields proved to be less vulnerable to hawkish US expectations in August. The correlation with two-year Treasury yields fell, even as the shorter-tenor US yields surged to a near 15-year high following last month’s Jackson Hole symposium.
(Updates total returns in third paragraph and upcoming India inflation figures in eighth paragraph.)
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