As rate woes roil Treasuries, bond funds shift to Asia

THE TREASURIES rout is making emerging Asian bonds look even more attractive.

Higher yields, buoyant economies, and a slower pace of rate increases in Asia suggest that sovereign debt in the region will outperform Treasuries, said Adam McCabe, head of Asian fixed income at Aberdeen Standard Investments. Indonesian, Chinese and Indian bonds offer value, according to Aberdeen, State Street Global Advisors and Amundi Asset Management.

“The fundamentals are still very strong in Asia from an economic perspective, and the adjustment from a policy perspective is larger in the US than it is in Asia,” McCabe said in an interview in Singapore. “Those policies weren’t adopted in Asia, so the room for bond yields to move should be less.”

As the Federal Reserve moves to dial back its stimulus and the market starts to consider a quicker pace of interest-rate increases, the 10-year Treasury yield has surged to a four-year high with debate raging over how far and fast it will advance. While Asian central banks are also starting to tighten, the expectation is for a more gradual increase, according to State Street.

The yield on Indonesian government notes due in a decade has climbed 10 basis points in February to 6.42%, while that on Indian securities rose 15 basis points to 7.58%. In China, yield on the 10-year bond is down 3 basis points to 3.89%.

In comparison, the 10-year Treasury yield has increased 17 basis points and reached a high of 2.94% last week.

“On the whole for Asia, we’re seeing a bit of a slow normalization of interest rates,” said Ng Kheng Siang, Singaporebased Asia Pacific head of fixed income at State Street, which oversees $2.67 trillion. “We’ve seen that action taking place in Korea, Malaysia and possibly the Philippines may be next. We’re not seeing a major policy change.”

Once the recent volatility eases, local-currency China and Indonesian government bonds may offer buying opportunities, according to Ng. China is attractive due to the prospect of the nation’s inclusion in major bond indexes while economic reforms, domestic consumption and infrastructure spending will support Indonesia’s outlook, he said.

Amundi is similarly keen on Southeast Asia’s biggest economy, which won upgrades from two rating companies last year on the back of improving finances and accelerating growth. Global funds have bought $1.1 billion of rupiah sovereign debt so far this year after pumping in $12.1 billion in 2017.

“We still like markets that have increased credibility in policy making and improved structural inflation dynamics,” said Wan Howe Chung, Amundi’s Singapore-based head of Asian fixed income. “These include Indonesia which very much falls into this bucket. With this sell-off, we’re potentially adding some risk. It’s not cheap but there will be a point that we’ll feel that it’s cheap enough.”

For Amundi and Aberdeen, Indian bonds are a standout thanks to their relatively high yields and Prime Minister Narendra Modi’s policy initiatives. “We see the reform effort as being ongoing and the direction of travel is very clear,” said McCabe. “As these reforms take shape, what you’ll find is that the country risk premium should decline.” •