India, Indonesia Bonds: The Latest Emerging-Market Darlings
26 September 2017 - 7:25AM
Dow Jones News
By Saumya Vaishampayan
Investors are rushing into the bond markets of India and
Indonesia, drawn by rich yields and the rosy growth prospects of
countries that a few years ago were considered among the most
vulnerable emerging markets.
The two Asian countries have together captured almost one-fifth
of emerging-market bond net inflows this year through August,
according to data from the Institute of International Finance, a
trade group.
Prices of government bonds in both countries have rallied in
recent months. That has brought yields down, though they remain
higher than those for equivalent bonds in the U.S. and Europe. The
yield on India's 10-year government bonds has fallen to 6.619% from
6.711% six months ago, when more than $1 billion in net flows
started pouring into the country's debt market. Bond yields fall
when their prices rise.
In Indonesia, the 10-year bond yield has fallen to 6.310% from
7.094% in the past six months. That yield was nearly 8% at the end
of 2016, following heavy outflows from emerging markets after
Donald Trump won the U.S. election.
As with any popular trade, the worry is that the first sign of
trouble could send investors running, especially in countries where
they hold sizable bets. Such shocks could come from a
faster-than-expected pace of U.S. interest rate increases, or a
slowdown in Chinese growth, analysts say.
"When volatility in the market comes back, those are positions
that are probably the first ones to be hit," said Roland Mieth,
emerging-markets portfolio manager at Pacific Investment Management
Co. in Singapore.
Four years ago, foreign investors started dumping Indian and
Indonesian debt after the U.S. Federal Reserve indicated it would
gradually wind down its bond-buying program, part of the so-called
taper tantrum in emerging markets that year.
Swift reversals in the foreign-exchange market may also pose a
risk for investors who own local-currency debt. The Indian rupee is
the most crowded currency in Asia and the fourth among emerging
markets globally, according to Bank of America Merrill Lynch. The
rupee has advanced more than 4% against the dollar so far this
year.
Signs that U.S. and European central banks are preparing to
reverse loose monetary policy haven't triggered lasting routs in
Indian and Indonesian bonds. Indian bond yields rose last Thursday
after the Fed said it would start shrinking its bond portfolio, as
expected.
One reason for investor steadiness is that long-term
institutional investors are increasingly investing in Indian and
Indonesian debt, as opposed to shorter-term investors like hedge
funds, said Rob Subbaraman, chief economist, Asia ex-Japan at
Nomura.
Investors say they're also banking on the success of economic
overhauls in both countries. The World Bank's distance-to-frontier
gauge, which measures changes in regulatory environment for local
businesses in different countries, has signaled improvement for
India and Indonesia in recent years.
Nonresident investors bought a net $2.72 billion of Indian
sovereign and corporate debt in August--17% of total
emerging-market bond inflows--according to the Institute of
International Finance. Those investors plowed a net $907 million
into Indonesian bonds last month. For the year, investors have
poured a net $20.2 billion and $9.1 billion into Indian and
Indonesian debt markets, respectively.
With the influx of cash, foreign ownership of rupiah-denominated
Indonesian government bonds rose to 39.5% at the end of the second
quarter, the highest in two years, according to data from the Asian
Development Bank.
Foreign ownership of Indian bonds is quite low--4.2% as of July,
according to ANZ--because of limits imposed by the country's
central bank.
Ken Hu, chief investment officer for Asia-Pacific fixed income
at Invesco in Hong Kong, says he has been participating in Indian
government bond auctions almost every week as he tried to add to
his holdings of local-currency debt in the country.
He says efforts such as Indian Prime Minister Narendra Modi's
goods and services tax, which replaced a complex system of state
and local taxes with a type of value-added tax, and Indonesian
President Joko Widodo's campaign to boost Indonesian manufacturing
are reasons why he likes bonds in both countries.
Jon Emont contributed to this article.
Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com
(END) Dow Jones Newswires
September 26, 2017 02:10 ET (06:10 GMT)
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