Foreign investors are turning into net buyers of major emerging market bonds in Asia for the first time in months, if the Federal Reserve hints at more significant inflows to more calibrated rate tightening.
In August, Global Funds poured $1.4 billion into Indonesian bonds in net growth for the first time in six months, while India This has seen them loading up on rupee notes of $68 million, which is a profit in seven months. Even Thailand saw its first influx since May.
The influx showed foreign funds were betting that the Fed would pivot and become less aggressive amid signs of an economic slowdown. Chair Jerome Powell’s much-anticipated speech to central bankers on Friday in Jackson Hole will help show whether those bets were premature.
Vishnu Varthan, head of economics and strategy at Mizuho Bank Ltd., said in Singapore, “It appears that the ability to manage soft landings is the key to a quick and sustained revival of investor appetite for EM Asia bonds.” “Inflation and how viscous it can be will also differentiate the return of inflows.”
Large volumes in August came during the first half, as markets viewed Powell’s comments at the July FOMC as less aggressive. While Fed officials have since pushed back against the dovish narrative, global funds have not completely reverse course.
Their mild position in EM Asia’s bond markets may have helped investors once again increase exposure. Global Funds now owes only 16% to the Indonesian government, down from 39% at the beginning of 2020. The same gauge for Malaysia has fallen every month since February this year and is now at 23.3%.
Some policy makers in the sector are still trying to balance inflation and growth challenges that add to their debt attractiveness. Central banks in Indonesia, Malaysia and Thailand have followed a far more moderate hardline, in contrast to sharp moves in Latin America.
Country-specific factors may have worked in favor of some. Investors will be excited by Indonesia’s fiscal consolidation plans, as the government aims to narrow the fiscal gap to 2.85% of GDP in 2023, well below the 3% target left during the COVID-19 crisis.
However, the game changer for the region will be signs of extreme inflationary pressures, which have so far held out of most of emerging Asia. In India, hawkish expectations for the central bank have eased as real inflation missed economist estimates for three straight months, the longest stretch among peers. Indonesia will release inflation data in August on 1 September.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.
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