Falling global interest rates and the promise of respite in long-running Sino-US trade tensions are luring investors seeking decent yields to emerging Asian bonds.
With much of the developed world debt offering negative or negligible yields, and stock markets frustrated by slowing global growth and weakening prices, investors have turned to Asia.
Bond markets in the region still offer a decent yield premium over US Treasuries, and the dovishness of central banks in Asia could lead to further rises in bond prices, thereby spurring the borrow-low, invest-high carry trades.
“In a world where a significant amount of bonds have negative yields, Asian bonds provide investors with positive and higher yields,” said Bertram Sarmago, portfolio manager, Asian fixed income at Nikko Asset Management.
“Our preference in Asia would be for bonds with mid to high carry, and have room for a shift to dovish monetary policy in the near term.”
Mr Sarmago said he liked higher-yielding countries such as Indonesia, India, the Philippines and Malaysia in a slow-growth, low-inflation and dovish environment.
Indian 10-year government bond’s yield is 4.5 per cent over comparable US Treasuries, just behind Indonesia’s spread of 5.2 per cent.
Besides the higher bond spreads in India and Indonesia, the strong performance of their currencies against the US dollar this year also makes them popular carry trades, analysts said.
Goldman Sachs said recent developments such as the resumption of Sino-US trade talks and expectations of policy easing by the Federal Reserve were conducive to emerging-market carry trades again.
“The Fed’s dovish stance should keep the dollar and core rates pinned down, which should pave the way for Asian FX appreciation against the dollar. Meanwhile, dovish Asian central banks should be positive for local fixed income markets,” it said.
Also, implied volatiles, derived from option prices, indicated Asian currencies are unlikely to see sharp swings in the coming days. The one-month dollar-rupee implied volatility has fallen about 300 basis points this year to 5.7 per cent, while the dollar-rupiah volatility dropped over 200 basis points to 6.3 per cent, data from Refinitiv showed.
The Sharpe ratios, which measure volatility-adjusted returns, for the rupiah, the Thai baht and the Philippine peso have risen sharply this year. The risk-adjusted returns for these three currencies have been more than 4 per cent each so far this year, Reuters calculations showed.
These factors have contributed to higher investments in emerging Asian bonds. Foreigners bought a net $16.3 billion of regional bonds in the first half of 2019, compared with their net purchase of about $10 billion in the whole of 2018, data from regional banks and bond market associations in Malaysia, Thailand, Indonesia, South Korea and India showed.
“Should the Fed actually cut, we can expect central banks from the Philippines and Indonesia to follow suit, which will further bolster the returns from Asian bonds,” said Wilfred Wee, a portfolio manager at Investec Asset Management.
“Asia is a natural stop, given the robust growth fundamentals and decent real bond yields across most Asian economies.”