Emerging Asia Bonds Struggle in Global Rally
The global bond market has been on a tear in recent months, with yields on government debt from the U.S. to Europe and Japan hitting record lows. But emerging Asia bonds have been left out of the rally, as investors bet that the Federal Reserve will keep interest rates low for the foreseeable future.
Fed Policy and Yields
The Fed has kept interest rates near zero since the start of the pandemic, and has signaled that it will keep them there for the foreseeable future. This has led to a surge in demand for government bonds, as investors seek out safe havens in a low-yield environment.
The result has been a sharp decline in yields on government bonds around the world. In the U.S., the 10-year Treasury yield has fallen from 1.9% in March to just 0.8% in November. In Europe, the 10-year German Bund yield has dropped from -0.3% to -0.7%. And in Japan, the 10-year JGB yield has fallen from 0.1% to -0.1%.
But in emerging Asia, yields have remained stubbornly high. The 10-year Indian government bond yield is still at 6.2%, while the 10-year Indonesian government bond yield is at 6.7%.
Risk Aversion
The reason for the divergence is that investors are still wary of taking on risk in emerging markets. The pandemic has hit emerging economies hard, and there is still a lot of uncertainty about the outlook for growth.
At the same time, the Fed’s policy of keeping interest rates low has made it difficult for emerging markets to attract foreign capital. With yields so low in developed markets, investors have little incentive to take on the additional risk of investing in emerging markets.
Impact on Currencies
The lack of foreign capital has also weighed on emerging Asia currencies. The Indian rupee, Indonesian rupiah, and Philippine peso have all weakened against the U.S. dollar since the start of the pandemic.
The weak currencies have made it more expensive for emerging Asia countries to service their debt, as they have to pay more to borrow in foreign currency. This has further dampened investor appetite for emerging Asia bonds.
Investor Sentiment
The lack of foreign capital has also weighed on investor sentiment in emerging Asia. Many investors are wary of taking on risk in the region, and are instead opting for safer investments in developed markets.
This has led to a flight of capital from emerging Asia, as investors seek out safer havens in developed markets. This has further weighed on emerging Asia bonds, as investors have been reluctant to take on the additional risk.
Outlook
The outlook for emerging Asia bonds remains uncertain. The Fed’s policy of keeping interest rates low is likely to continue for the foreseeable future, which could keep yields in developed markets low.
At the same time, investors are likely to remain wary of taking on risk in emerging markets. This could keep yields in emerging Asia high, as investors remain reluctant to invest in the region.
The only way for emerging Asia bonds to catch up with the global rally is for investors to become more comfortable with taking on risk in the region. Until then, emerging Asia bonds are likely to remain out of the global rally.