In Two Years, Foreign Investors Emerge as Top Buyers of Asian Bonds

Asian bonds saw a surge in foreign investments in May, recording the highest monthly inflows in nearly two years. This can be attributed to the optimism surrounding the U.S. Federal Reserve’s less aggressive approach to monetary tightening. Data from regulatory authorities and bond market associations revealed that investors purchased a net of $10.1 billion worth of bonds in India, Indonesia, Malaysia, South Korea, and Thailand. According to Fiona Lim, a senior fx strategist at Maybank, Asian bonds, excluding China, stand to benefit from the Fed’s nearing the end of its tightening cycle, especially considering the resilient macroeconomic conditions in most countries.

Although the Federal Reserve kept interest rates unchanged, breaking the trend of 10 consecutive rate hikes, it hinted at two small rate hikes by the end of the year to address concerns about inflation. Analysts also noted that investors were encouraged by signs that regional economies had reached their peak inflation levels, leading to expectations of interest rate cuts by central banks to stimulate economic growth.

South Korean bonds experienced the highest net purchases of $8.2 billion since June 2021. Khoon Goh, the head of Asia Research at ANZ, suggested that the Bank of Korea is considering potential rate cuts towards the end of the year, which has increased the attractiveness of South Korean bonds.

Malaysian and Indonesian bonds attracted foreign inflows worth $652 million and $500 million respectively, while India and Thai bonds received around $400 million each in the last month. Maybank’s Lim also mentioned that disappointments over weaker-than-expected data from China in May, coupled with U.S.-China tensions, may have led to a re-allocation of bond flows from China to other Asian countries. Although there was a slight rebound in foreign demand for Chinese bonds in May, the percentage of foreign holdings as part of total outstanding Chinese government bonds remained at 8.3%, the lowest since July 2019, according to a report by Barclays.

It is evident that foreign investors are showing increased interest in Asian bonds, driven by expectations of a more favorable monetary policy environment and the potential for economic growth in the region. This trend is likely to continue as the global economic landscape evolves.

 

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