Emerging Asian bonds rally as investors hunt for yield

By Jongwoo Cheon

SINGAPORE (Reuters) - Global investors facing low returns for bonds from developed markets are aggressively buying higher-yielding emerging Asian debt, encouraged by the prospect of more monetary policy easing as Brexit threatens the global economy.

Central banks of major economies are keeping policy loose to protect growth while the U.S. Federal Reserve is not in a hurry to raise rates amid fresh uncertainties following Britain's shock vote to leave the European Union.

The Bank of Japan has already cut rates to negative and other central banks in the region, such as in Malaysia, New Zealand and Australia, have lowered rates.

"The fixed income rally in Asia has been impressive, but we still think there is some more room to go, especially for high yielders as we see more rate cuts in the pipeline in several countries," said Jens Nystedt, portfolio manager and head of sovereign research for the emerging markets debt team at Morgan Stanley Investment Management in New York.

Foreign investors added 5.7 billion ringgit ($1.4 billion) worth of Malaysia's bonds in July, central bank data showed.

Investors bought Malaysian bonds even as concerns revived over scandal-plagued state-owned fund 1Malaysia Development Berhad (1MDB).

Nystedt said the recent widening in Malaysian bond yields due to lower oil prices and other concerns would fade as the market refocuses on the outlook for rate cuts and the country's strong fundamentals.

"We would expect Malaysian bonds to recover recent ground lost... moreover, we would welcome signs of higher expenditure constraint on the back of shortfall in revenue collection. Continued fiscal discipline would be a welcome anchor for Malaysian rates," Nystedt said.

Indonesia enjoyed bond inflows of a combined 8.2 trillion rupiah ($625.2 million) in the first 10 days of August after investors increased the country's bond holdings by 15.0 trillion rupiah in July, finance ministry data showed.

The country's new tax amnesty programme and appointment of the World Bank's managing director Sri Mulyani Indrawati as finance minister, boosted confidence in Indonesia's attempts to plug deficits and accelerate economic reforms.

India saw more than $1 billion in bond inflows last month as the country, along with Indonesia, offers one of the highest yields in the region.

Investors have also bought bonds with longer maturities on the prospect of further rate cuts.

Indian bonds got a boost last month when investors aggressively priced in possible rate cuts on speculation that Arvind Panagariya, the head of the government's main economic advisory body, could succeed outgoing Reserve Bank of India Governor Raghuram Rajan. Panagariya was widely seen as dovish.

In South Korea, foreign investors bought a combined net 1.5 trillion won ($1.4 billion) worth of local bonds in the first 10 days of August, the Financial Supervisory Service's (FSS) preliminary data showed. This week, Standard & Poor's said it upgraded the country's sovereign rating to AA from AA- with a stable outlook.

Foreigners added 588 billion won worth of South Korean bonds in July with net investments of 3.7 trillion won in maturities of one year or more, the FSS said.

Meanwhile, the Thai bond market reported 21.6 billion baht ($620.9 million) of inflows in the first five days of August, Thai Bond Market Association data showed.

That covered more than total outflows of 13.3 billion baht in July with foreigners' redemption of 24.0 billion baht in short-term debts' expiration.

GRAPHIC: Foreign flows into Asian local bonds https://bsmedia.business-standard.comtmsnrt.rs/29uYjbz

(Reporting by Jongwoo Cheon; Additional reporting by Neha Dasgupta in NEW DELHI and Masayuki Kitano; Editing by Jacqueline Wong)