Asia ex-Japan bond funds see highest outflow of the year in May as rate hikes, Ukraine war and Covid hit risk appetite
- Net outflow from Asia bond funds ex-Japan rises in May to US$6.3 billion, highest amount this year
- US, European investors are cutting back on Chinese government bonds and Asia investment grade paper as US rates rise and amid growth concerns
Asia ex-Japan bond funds saw the heaviest net outflow year-to-date in May, as investors were deterred by lower expected returns amid rising US interest rates, with even lower risk paper such as government bonds being shunned.
Net outflows from bond funds totalled US$6.3 billion for the four weeks up to May 25, data from EPFR Global shows. The bulk of redemptions came from investment grade bonds, or those that are rated BBB- and above by ratings agency S&P, and Baa3 and above by rival Moody’s.
Interest rate hikes in the US have historically contributed to outflows from Asian emerging market bonds. But this year an inflationary spiral and growth concerns caused by Russia’s invasion of Ukraine and China’s Covid-19 lockdowns have compounded outflows, said fund managers.
“As financial conditions tighten in the US and Europe - the latter being the biggest buyer of Asia sovereign bonds - investors are focusing on preservation of capital,” said Ales Koutny, emerging markets portfolio manager at UK asset manager Janus Henderson Investors.
Investors are selling Asian assets and reinvesting the capital in highly liquid bonds in their local markets, such as treasury bills, he said. The market currently expects the US Federal Reserve to hike rates to 2.65 per cent by the end of this year, from 0.75 per cent to 1 per cent now.
That cushy margin disappeared earlier this year, with the Chinese government bond returning less than its US counterpart. Both assets were yielding roughly the same, at around 2.8 per cent, on Tuesday.
“We expect the [Chinese] central bank’s focus to turn more towards credit easing than liquidity easing down the road, to boost the economy, and this will limit room for further downward moves in government bond yields,” said Wong.
This would be bad news for investors who already own Chinese government bonds in their existing portfolios because if the yield does not drop further, this will ruin prospects for bond prices to appreciate, given the inverse relationship between bond price and yield.
But fund flows may stabilise going into the next few months, as the sharp correction since the first quarter has also brought valuations to more reasonable levels, said Christy Lee, senior fixed income portfolio manager at AXA Investment Managers.
“Many global investors might [also] think twice about going into other Asian high yield bonds if they’ve lost money in China high yield,” he said.