Foreign investors cut Asian bond holdings amid Fed rate uncertainty

Inflation alters investments: Foreign investors reduced their holdings in Asian bonds last month due to revised expectations of a US Federal Reserve rate cut amid ongoing inflationary pressures. Concerns over upcoming national elections in South Korea and India also impacted capital flows in the region.

Data from regulatory authorities and bond market associations revealed that foreign investors sold a net $4.7 billion worth of bonds in South Korea, Indonesia, Thailand, Malaysia, and India, ending a four-month streak of purchases.

Fed rate outlook

Investor confidence in a June rate cut by the Fed dwindled as inflation persisted, with US consumer prices rising more than expected for the third consecutive month in March. Analysts now anticipate a rate-easing cycle to commence in September.

The two-year US Treasury yield, which typically mirrors interest rate expectations, reached a five-month high of 5.012 per cent last week.

Asia's bond bleed

South Korean bonds experienced the highest foreign outflows in a month since January 2023, with a net loss of $4.35 billion. ANZ's head of Asia Research, Khoon Goh, attributed this to rising US yields and the upcoming legislative elections in the country.

Indonesian bonds saw the largest monthly outflow since June 2022, with approximately $2 trillion worth of net selling, largely due to a decline in the rupiah.

Thai bonds witnessed continued foreign selling, with outflows totalling around $342 million, marking the fourth consecutive month of outflows.

Indian bonds still attract

On the contrary, Indian bonds continued to attract foreign capital for the twelfth consecutive month, totalling a net inflow of $1.64 billion.

Cross-border investors also purchased Malaysian bonds worth approximately $353 million last month.

(With Reuters Inputs)