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Investors Who Chased Asia's Highest Real Yielders Ended Up Last

Kartik Goyal and Chester Yung
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Investors Who Chased Asia's Highest Real Yielders Ended Up Last

(Bloomberg) -- Asia’s highest-yielding bond markets provided the worst returns in August.

Indonesian and Indian debt were at the bottom of the region’s rankings, returning virtually nothing despite real yields of at least 3%. By comparison, Thailand’s debt with real yields of just 0.6%, delivered the standout result. The reason for the dislocation: slowing global growth and rising trade tensions saw investors shun the debt of the less creditworthy nations, pushing down prices and incurring capital losses on investors owning them.

“If global-growth expectations continue to deteriorate and negatively impact risk appetite, this is likely to undermine EM currencies and the bond markets which are correlated with currencies, that is high yielders like Indonesia,” said Stuart Ritson, portfolio manager for emerging-market debt at Aviva Investors in Singapore. “We are being very selective in positioning in higher-yielding markets.”

Indonesia’s bonds handed investors a small loss last month, even though real yields -- nominal yields adjusted for inflation -- offered as much as 4.04%, the highest after Egypt of 47 global markets tracked by Bloomberg. A big part of the poor performance was due to selling by global funds, who offloaded a net $281 million of the nation’s debt in August.

Indian bonds fared almost as badly, returning a skimpy 0.1%. Escalating U.S.-China trade tensions also spurred foreign investors to offload a net $2.19 billion of the nation’s stocks.

Haven demand also hurt a number of EM assets by pushing up the dollar, which prevented central banks from easing policy as much as they would have liked, said Rajeev De Mello, chief investment officer at Bank of Singapore Ltd. “They have seen from past episodes that rising risk premia constraints their monetary policies.”

The attractiveness of the region’s bonds will be tested further this week with the release of inflation data for five local markets: Indonesia, Thailand, South Korea, the Philippines and Taiwan. Annual CPI is expected to slow in Korea, Indonesia and the Philippines, which should push up real yields and make those nations’ debt more attractive.

Still, the growing trade headwinds mean investors such as UOB Asset Management Ltd. are shunning high-yielding debt from countries such as Indonesia.

“We reduced our weights in some higher-yielding countries,” said Patrick Wacker, an emerging-market bond fund manager at UOB Asset in Singapore. We felt Indonesia may underperform despite favorable reforms, due to its commodity exposure to China, he said.

The real yields in the above table were calculated using economist forecasts for 2020 inflation and the average for August of constant-maturity 10-year bond yields. Bond returns exclude fluctuations in exchange rates.

Below are the key Asian economic data and events due this week:

--With assistance from Masaki Kondo.

To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net;Chester Yung in Singapore at kyung33@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Brett Miller

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