SINGAPORE – Foreign demand for Asia’s local currency bonds was patchy in August, showing signs of reversal in some markets as investors worried whether global monetary easing will continue and about broadly rising long-term yields if it does not.

Foreign investors further increased their holdings of markets such as Malaysia and other Southeast Asian countries, continuing to seek their high yields and promise of capital gains.

Yet, the shifting in the global sentiment over the past few weeks has had an impact as concerns grew that top central banks may not have additional measures to support economies after a slew of unconventional steps like negative interest rates and money printing.

Worries that the Bank of Japan (BoJ) may lead the way by forcing longer term yields up, and therefore steepening yield curves, also weighed on emerging market bonds.

“The global steepening of bond yields has caused people to reconsider the carry trades that were being put on earlier,” said Mirza Baig, head of currency and rates research for emerging Asia at BNP Paribas here.

“We’ve had a very solid run for the last four months if you look at any measure of emerging market bond performance,” Baig said, adding that the selloff therefore appeared to be driven by profit-taking.

Most emerging Asian bonds have been slumping since the European Central Bank on Sept 8 provided few hints about future stimulus.

The Federal Reserve is expected to hold interest rates this week, but the US central bank is likely to tighten this year. There is no consensus inside the BoJ on whether to deepen negative rates at the Sept 20-21 meeting, sources said.

Malaysia’s five-year government bond yield rose to 3.285% yesterday, its highest since July 5.

Saktiandi Supaat, Maybank’s head of FX research, said Malaysian bonds will see intermittent outflows although demand among long-term investors remains strong.

“The inflows have been significant and domestic factors such as weak economic data and commodities cycle can play a role,” Singapore-based Saktiandi said.

Malaysia was a hot spot in emerging Asia bond markets. Last month, it enjoyed RM6 billion of bond inflows, the largest since April. That came as US investment bank JPMorgan decided to include dollar-denominated Islamic bonds from Malaysia, Turkey and Indonesia in its emerging markets indices starting from Oct 31.

Foreign holdings in Malaysian bonds and bills, excluding sukuk, stood around 55% of total outstanding in the second quarter, increasing risks of more profit-taking.

The recent slide in crude prices is also likely to undermine the country’s oil and gas revenue, hurting sentiment. – Reuters