Thailand and India are better bets among the local currency bond markets

Fragile economies will experience outflows, currency depreciation and spread widening. Healthy economies will suffer less but currencies will still depreciate. These are the sentiments among investors when asked how they expect the US dollar movement to impact local currency bond markets over the next twelve months.

According to a recent survey conducted in the first quarter of the year, a negative impact to the Asian local bond markets is expected ahead of the potential appreciation of the dollar. Countries that have higher foreign investor participation, such as Malaysia and Indonesia, are likely to feel the greatest strain.

According to Asian Bonds Online, foreign ownership of Indonesian rupiah and Malaysian ringgit government securities was at about 38% and 25%, respectively, in March 2017. “Indonesian government bond trade is largely driven by foreign investors, and it's obvious that dollar to rupiah volatility is one of their considerations,” says an investment manager at a local insurance house in Jakarta.

A portfolio manager at a fund house in Kuala Lumpur raises similar concerns. “A substantial appreciation of the dollar against the ringgit might spark further outflow of foreign holdings in Malaysian government securities, which could cause the term spreads and credit spreads to widen,” he says.

Singapore dollar government securities will follow a similar trend of higher yields over time on the condition that the US dollar strengthens against the Singapore dollar. In this environment, Thai baht and Indian rupee bonds are considered the better bets.

In early March, foreign investors owned roughly 8% of Thai baht bonds, according to Bloomberg. When asked why the baht was his pick, a trader at a large US-headquartered fund house in Hong Kong mentioned the strong fundamentals including current account surplus. “It’s quite an internalized domestic economy which funds itself,” he says.

A fund manager at a large UK-headquartered asset manager in Singapore was also optimistic on Indian rupee bonds: “Commodity prices have come off again, so I think that will probably kick off some of the concern about higher inflation. They have been progressing and trying to push through some structural changes in the economy. So, there’s still a positive story there.”

Currently, the US dollar trades at a six-month low, however, expected rate hikes in the next six months loom.

Methodology
The 2017 Asian Local Currency Bond Benchmark Review surveys local currency bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from 11 Asian markets namely China, CNH, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. To learn more about the Asian Local Currency Bond Benchmark Review please click here.

Date

18 May 2017

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