Investors glum on Asia sovereign bonds as dollar, oil prices bite

ON TRACK for their first annual drop since 2015, emerging Asia’s sovereign bonds look set to call time on a two-year binge fueled by a tide of cheap money.

Investors start the fourth quarter on the defensive, thanks to soaring oil prices, a raging US-China trade war and a stronger dollar.

Indian and Indonesian debt will be the most vulnerable as risk sentiment remains fragile, even as policy makers step up efforts to contain the weakness, according to fund managers surveyed by Bloomberg.

South Korean and Thai bonds are seen among the safest bets, with the economies’ current-account surpluses compensating for their relatively low yields.

“There is room for some more correction in emerging Asian government bond markets,” said Roland Mieth, Singapore-based emerging markets portfolio manager at Pacific Investment Management Co. (PIMCo). “The main driver for this is global factors and the China outlook.”

Thomas Wu, head of Asia fixed income for discretionary portfolio management at Pictet Wealth Management in Hong Kong, agrees. “Until the US-China trade situation is resolved, we’re not really constructive on EM Asian FX,” he said. “For sovereign bonds, we are equally defensive and we’re not seeing an improvement or a turnaround for the time being.”

From a surge in crude oil to a stronger dollar, trade tensions to deficit fears, geopolitical risks to footloose global capital flows, investors face a busy end to the year trying to pick the region’s winners and losers. With the Bloomberg Barclays EM Local Currency Government Asia Index already down 3.6% this year, they may face a further headache after Treasury yields rallied to a seven-year high Wednesday.

PHILIPPINES

Philippine bonds were the region’s worst performer last quarter, with a loss of almost five percent.

The peso slumped to the lowest since 2005 last month amid worries about the nation’s current-account deficit and a perception that the central bank was behind the curve in tackling inflation.

The negative sentiment may ease after Bangko Sentral ng Pilipinas raised its benchmark interest rate by half a percentage point for a second consecutive meeting in September. Policy makers have also pledged to do what’s necessary.

For AllianceBernstein — which has been underweight Philippine bonds for the past five years — peso yields may be approaching attractive levels.

“Philippine bond yields are around six percent and the BSP has become more aggressive with tightening,” said Gibson at AllianceBernstein.

“Philippine bonds will start to look attractive for the first time in many years as the yield you can earn on the Philippine peso is sufficient for the volatility you may incur.

INDIA

Indian sovereign bonds are down 12% so far in 2018, erasing last year’s gain as the rupee set a succession of record lows.

Once favored for their high yields, rupee notes have lost their shine as a rally in crude prices threatens to inflate India’s oil import bill and worsen a current-account shortfall which stands at a five-year high. Policy makers are set to raise interest rates for a third time this year on Friday, adding to a recent flurry of measures aimed at shoring up the currency.

As oil marches toward the $100 mark for the first time since 2014, analysts warn costlier crude will further stoke inflation and hurt sentiment toward a market that’s already reeling from a rare default at a local lender.

“If the oil price continues to go up, that will continue to weigh on the current-account balance and add to further weakness,” said Alexandre Bouchardy, head of Asset Management Singapore at Credit Suisse Asset Management. “It’s hard to say how much more interest rates have to rise as it depends on where oil prices go, but probably anything between 50-200 basis points from current levels.” —