FOREIGN investor interest in emerging East Asian bonds remains strong despite rising interest rates in the US and in the domestic bond markets. This comes as foreign investors raised their holdings in the fourth quarter of 2017 on the back on improving economic fundamentals, according to the latest report by the Asian Development Bank (ADB) released on March 19.

The latest issue of Asia Bond Monitor published by the ADB shows that Malaysia manifested the largest increase in the share of foreign investor participation with a 1.3% increase in the last quarter to reach 29.2% at the end of December due to positive economic fundamentals.

In Indonesia, the foreign investor share of government bonds outstanding remained stable at 39.8% in the fourth quarter of 2017 underpinned by the improving economy as manifested by the rating upgrade to BBB by Fitch Ratings in December.

The rating upgrade helped Indonesia attract the highest net inflows from foreign funds. Indonesia also has some of the highest bond yields in the region and is also one of the few markets that reduced its policy rates in 2017, thus pushing up bond prices.

However, the strong investor interest did not result in a higher share of foreign investor holdings in Indonesia given the increase in government bonds outstanding. The year-on-year growth rate of 14% in the Indonesian bond market in the fourth quarter of 2017 was the second-fastest in the region during the period.

Thailand had the second-highest net fund inflows in the fourth quarter of 2017 and the second-highest net inflows in full year 2017 largely on the back of strong economic fundamentals. The country’s strong current account-to-GDP ratio is cited as one factor in the relative attractiveness of its bond market.

The share of foreign investors in the China bond market, while small, continued to rise in the fourth quarter to 3.6% at the end of December, compared with 3.4% at the end of September. Also demonstrating growth was Korea, where the share of the foreign investors of the government bonds outstanding rose to 11.4% at the end of September from 10.9% in the previous quarter.

On the other hand, the share of foreign holdings in emerging East Asia’s local currency corporate bond market remained low relative to government bonds due to the illiquidity of the corporate bonds and the need for additional due diligence on the part of investors. Only Indonesia has a somewhat substantial share of foreign investors to corporate bonds outstanding among all markets in the region for which such data are available.

However, this share fell to 7.9% at the end of December 2017 from 8.3% in September. Both China and Korea have foreign investor shares in their respective corporate bond markets of less than 0.5%.

Overall, the size of the emerging East Asia local currency bond markets continued to grow in the fourth quarter of 2017 and stood at US$12.3 trillion at the end of December. Growth was broad-based across the region, with all markets manifesting upward trends. The growth rate, though, moderated to 3.1% quarter-on-quarter from 4% as bond issuances declined.

Total government issuances fell 26.9% quarter-on-quarter to US$722 billion due largely to reduced activity in China on the back of measures imposed by the government to control the economy’s spiraling debt, according to ADB. Lower issuance volumes were likewise noted in Indonesia and Korea as both met their funding requirements in the previous quarters. These markets comprised more than half of the region’s government issuance in the fourth quarter of 2017, muting the issuance increments recorded in the other emerging East Asia markets.

The local currency corporate bond issuance, meanwhile, showed little change from the third quarter of 2017 at US$381 billion. The issuance activity was driven by corporates taking advantage of the relatively low interest rates ahead of the likely tightening in monetary policy in 2018 from most central banks in the region as well as in advanced economies.

In terms of yield curves, the local currency government bond yield curves steepened between December 29 2017 and February 15 2018. Yields on 10-year bonds were largely up, while those on two-year bonds declined in most markets. The ADB attributes the steeper yield curves to the positive economic outlook in the region and expectations of rising inflation.