Emerging Market Debt Beckons Funds After Treasury Yields Slump

(Bloomberg) -- A surge of offshore investments into higher-yielding sovereign debt in Asia is looking inevitable after the U.S. elections.

Bets on higher Treasury yields have unwound on lower expectations of a Democratic sweep of both the U.S. presidency and the Senate, and the prospects of a large stimulus deal. Traders have piled into Asian debt, with Indonesia’s benchmark bond yields dropping more than 30 basis points in two days to the lowest since February 2018.

“EM Asia offers a very attractive investment proposition for investors in this lower-for-longer yield environment,” said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments Asia Ltd. “We see more opportunities in Asia high-yield bonds over investment-grade bonds, largely due to supply risk concerns and low absolute yield levels.”

A divided U.S. government is being touted by market watchers as a favorable election outcome for Asian assets. Lower Treasury yields means emerging-market bonds are more attractive, while a Joe Biden presidency could lead to a more conventional trade policy beneficial to the export-dependent region.

The benchmark 10-year sovereign bond in Indonesia, a bellwether for foreign interest in EM Asia, offers a yield of around 6.3%, while Indian debt of a similar tenor yields 5.9%. Treasury 10-year yields were at 0.82% on Friday while the pile of negative-yielding debt globally rose to a record $17.1 trillion.

“There is definitely pressure to hunt for yields,” said Eugene Leow, a fixed-income strategist in Singapore at DBS Group Holdings Ltd. A divided house “with the prospect of a Biden presidency could be sufficient to prompt investors to put their money to work in underperforming EM markets,” Leow said.

Investors were already turning positive on Asia even before the election.

Offshore investors bought $1.2 billion of Indonesian bonds in the current quarter, helped by a new law aimed at creating jobs in the nation. That’s more than reversed a sell-off in the preceding two months that was driven by concerns over the central bank’s debt monetization.

Other Asian nations have also seen favorable flows as they slowly emerge from a coronavirus-induced slump. Foreign holdings of Chinese bonds surged to a record high in October while Indian sovereign debt ownership grew by the quickest pace this year.

However Asia’s yield advantage has its limits. Indonesia’s economy fell into its first recession since the Asian financial crisis, raising the prospect for further central bank easing. India on the other hand faces stubbornly high inflation, capping the return on its bonds.

Below are the key Asian economic data and events due this week:

• Monday, Nov. 9: Malaysia industrial production, Singapore foreign reserves, Japan lending index and Bank Indonesia consumer confidence index
• Tuesday, Nov. 10: China CPI, Japan current account, Philippines GDP and Thailand consumer confidence
• Wednesday, Nov. 11: New Zealand rate decision, South Korea unemployment and Australia consumer confidence
• Thursday, Nov. 12: India CPI and industrial production, Japan foreign bond buying and PPI, Australia inflation expectations and South Korea trade
• Friday, Nov. 13: Malaysia GDP and current account, New Zealand manufacturing index and Thailand reserves

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