Asian Bonds Lose Allure on Yields, Currencies, DBS Asset Says

By Lilian Karunungan

Feb. 4 (Bloomberg) -- Asia’s local-currency government bonds have lost their allure after central bank interest-rate cuts reduced yields, DBS Asset Management Ltd. said.

Declines in Asian currencies will also discourage overseas investors from buying the debt, Desmond Soon, vice-president for fixed income at a unit of Southeast Asia’s largest lender, said in a Jan. 30 interview. DBS Asset and its associated companies manage the equivalent of $15.5 billion in assets.

“There is no risk premium for owning Asian local-currency bonds, which most investors still regard as emerging-market assets,” Soon said. “We see limited downside for yields but expect them to stay low as well.”

Asia’s bonds had their biggest monthly gain in almost a decade in December as policy makers lowered borrowing costs, shifting their focus from quelling inflation to supporting economic growth. The securities dropped last month on concern slumping exports will erode government finances and deter foreign investors from buying assets in the region.

Bond yields in the region’s developing nations have declined to an average of 4.35 percent from as high as 19.8 percent on Oct. 24, according to JPMorgan’s Emerging Local Markets ELMI Plus Asia index. The average yield for all emerging markets is 8.2 percent, according to a separate JPMorgan index. The yield on the 10-year U.S. Treasury note is 2.75 percent, 54 basis points higher than at the start of 2009.

Rate Cuts

Bank Indonesia will probably lower its benchmark borrowing cost by 50 basis points to 8.25 percent today, according to 20 of 23 economists in a Bloomberg News survey. Bank Negara Malaysia cut its overnight policy rate last month by three- quarters of a percentage point to 2.5 percent. The Bank of Thailand in January reduced its one-day repurchase rate by the same amount to 2 percent.

The rate cuts have brought yields on shorter-maturity debt down faster than longer-dated bonds. The yield on 10-year Thai government debt is now 164 basis points higher than that on three-year bonds, compared with 65 basis points at the start of the year.

“Local players may continue to find Asian local government bonds attractive as local money-market rates are low and the yield curve is relatively steep,” said Soon. “However, for offshore players with no onshore funding, the equation is different.”

Eight of Asia’s 10 most-active currencies excluding the yen have weakened against the U.S. currency this year as falling rates damped their allure. The Korean won fell 8.7 percent and the Indonesian rupiah 6.6 percent.

Foreign Investment

Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the International Monetary Fund said in an update of its World Economic Outlook report last week. The MSCI AC Asia Pacific excluding Japan Index of regional stocks has declined 8.5 percent this year.

“Asian currencies will weaken as many Asian countries depend on foreign fund inflows to sustain their asset markets,” Soon said. “If there is an economic recovery, investors will return to Asia but the question is: will there be a strong recovery in the second half of 2009? I am not optimistic about this scenario.”

Local currency debt in the region declined 3.6 percent in January, following a 9.7 percent rally that was the biggest since at least 2001, according to an index tracking 10 Asia markets compiled by HSBC Holdings Plc. Thailand’s local-currency bonds have lost 2.9 percent this year, second only to India’s 3.3 percent drop.

“With Thai government bond yields ranging from 2 percent to 3.4 percent in the 2 to 10-year tenors, these are not compelling valuations for the foreign-currency investor,” Soon said.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.