Surge in US yields sparked massive outflow from Asian bonds in Sept

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration. REUTERS/Jason Lee/Illustration/File photo

Asian bonds suffered massive foreign outflows in September, hit by a surge in U.S. bond yields and a stronger dollar, which diminished returns for international investors.

Foreigners sold regional bonds worth $3.7 billion from Malaysia, Indonesia, South Korea, and Thai markets, their biggest since June 2022, data from regulatory authorities and bond market associations showed.

Expectations that the U.S. Federal Reserve will keep the policy rates higher for longer to tame inflationary pressures have lifted bond yields in recent weeks.

READ: Fed policymakers see rates staying high for ‘some time’

Yield on the U.S. 10-year Treasury note jumped 48 basis points (bps) last month, the most since September 2022, and has risen a further 37 bps so far this month.

With the surge in U.S. yields, most Asian government bonds are providing lesser yields than their U.S. counterparts despite higher risks, making foreign investors less motivated to invest in them.

Indonesian bonds bore the brunt of the outflows, experiencing net sales of $1.5 billion last month, the largest in a year. The rupiah hovered near a 3-1/2 year-low against the dollar on Friday, hurt by the surge in U.S. yields.

In a move to stabilize the rupiah’s decline, Indonesia’s central bank surprised markets with a 25 bps rate hike this week, its second such hike this year.

READ: Indonesia central bank unexpectedly raises rates amid falling rupiah

Overseas investors also offloaded Malaysian, Thai, and South Korean bonds worth $940 million, $786 million and $471 million, respectively.

“We stay wary of further upside for USD/MYR given the risk of a further climb in the UST yields. Malaysia rates have been lagging well behind the U.S. given that BNM has not hiked as much as the Fed,” said Saktiandi Supaat, head of Asia forex research at Maybank.

However, foreigners still poured about $113 million into Indian bonds on optimism over their inclusion in JP Morgan’s widely-tracked emerging market debt index next year.

Analysts said the ongoing geopolitical tensions in the Middle East would add risks to the foreign flows into the region.

“The Palestine-Israel conflict has pushed up oil prices and is likely to weigh on investor sentiment in the near term, leading to further portfolio outflows from the EM Asia,” said Khoon Goh, head of Asia Research at ANZ.