Global bond inflows to emerging Asian markets signal shift in outlook

Overseas investors are turning into net buyers of key emerging markets bonds in Asia for the first time in months, hinting at more significant inflows if the Federal Reserve goes for a more calibrated rate tightening.
 

In August, global funds have poured $1.4 billion into Indonesia bonds in the first net addition in six months, while India has seen them loading up on rupee notes of $680 million, a gain in seven months. Even Thailand saw the first inflow since May.

The inflows suggest foreign funds were betting that the Fed will pivot and become less hawkish amid signs of an economic slowdown. Chair Jerome Powell’s much anticipated speech on Friday at Jackson Hole to central bankers will help show if those bets were premature.

“Looks like the ability to manage a soft landing remains the key to a quick and sustained revival of investor appetite for EM Asia bonds,” Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd., said in Singapore. “Inflation and how sticky it may also be will differentiate the return of inflows.”

A bulk of the inflows in August came in during the first half, as markets perceived comments from Powell at the July FOMC to be less hawkish. While Fed officials have since pushed back against the dovish narrative, global funds didn’t fully reverse course.

Their lighter positioning in EM Asia’s bond markets may have helped investors seeking to increase exposure once again. Global funds now own only 16% of Indonesia government bonds outstanding, down from 39% at the start of 2020. The same gauge for Malaysia has fallen every month since February this year and now stands at 23.3%.

Some policy makers in the region are still trying to balance the inflation and growth challenges which add to the allure of their debt. Central banks in Indonesia, Malaysia, and Thailand have embarked on a more moderate tightening path so far, which stands in stark contrast to the hawkish moves in Latin America.

Country-specific factors may have worked in the favor of some. Investors would have been buoyed by Indonesia’s fiscal consolidation plans, as the government targets to narrow the fiscal gap to 2.85% of the gross domestic product in 2023, back below the 3% target abandoned during the Covid-19 crisis.

However, the game changer for the region will be signs of peak inflationary pressures, which have so far eluded most of emerging Asia. In India, hawkish expectations have eased for the central bank after actual inflation missed economist estimates for three straight months, the longest stretch among peers.