ASIAN DEBT MARKET REMAIN HOT ZONE FOR FII
Overseas investors bought a net $4.7 billion worth of Asian bonds last month, the lowest since January this year, data from regulatory authorities and bond market associations showed. Foreigners purchased a net $5 billion worth of South Korean bonds, marking a fifth straight month of inflows. That pushed the holdings of overseas investors in South Korean bonds to 8.3% at the end of May, the highest since at least 2014.Thanks to South Korea's strong growth recovery and shorter timeline to policy lift-off. Currently 10YR Korean bond yields trading at historically wide spreads to U.S. Treasuries and other peer EM low-yielders. Even on an FX-hedged basis, Korean bonds also continue to offer consistently high pick-ups over U.S. Treasuries. Malaysian bonds also attracted $453 million worth of foreign money, which was the 13th consecutive inflow. On the other hand, Indonesia and Indian bonds faced outflows worth $501 million and $237 million, respectively.
Net on, FII buyers of Asian bonds, helped by a drop in U.S. bond yields and a recovery in the region’s economic activity. The bond inflows were in contrast to the outflows experienced by regional equity markets last month, however, the net purchases in Asian bonds were the lowest in four months due to worries over a resurgence of regional coronavirus cases. But still more room for foreign investor flows into the region, facilitated by improving global risk sentiment and as vaccination drives gather pace in a number of economies in Asia. Or the region, the improved performance of Chinese asset markets may also develop into a fresh driver of strength.
A record $1.8 trillion worth of bonds are set to mature in Asia this year, data shows, leading to a rush to refinance them in the coming months. Most of the maturing bonds in Asia are from China, South Korea, Australia and India and the region dwarfs Europe and the United States in terms of the total. The refinancing surge is set to bring a fee bonanza to banks, even though investors are viewing bonds from China with caution after some issuers defaulted, and as risk is growing in markets such as India due to a resurgence of COVID-19 cases. The $1.8 trillion maturing debt includes dollar bonds of $283.4 billion, also the highest on record, the data showed.
Record low interest rates and easy global liquidity have led to increased activity in Asia's debt markets this year, but bankers said new issuance for fresh spending may start to taper. A lot of the issuers who have come to the market have already done so, hence incremental volume from new issuers and existing borrowers who want to raise money will be more modest over time. In South Korea, $18.8 billion worth of bonds have been issued so far in 2021, nearly double the same period a year ago and triple the level of activity in 2019.Green and sustainable bonds issued this year in the Asian nation have been worth $6.4 billion, a near five-fold increase over the same period in 2020, the data showed. South Korea's government has set the target for the country to be carbon neutral by 2050 which has prompted companies to step up issuing environmental, social and governance (ESG) linked debt. But stubbornly high coronavirus cases in some countries, like Indonesia, may temper demand for Asian bonds.
