The prospect of a Fed rate cut boosts optimism as bond funds flow into Asian emerging markets for the first time in three years
The five largest emerging bond markets in Asia saw net inflows for the first time in three years, indicating increased optimism among investors in this market. Since early July, foreign investors have increased their holdings of debt in South Korea, Thailand, Indonesia, India, and Malaysia. Analysis suggests that expectations of a rate cut by the Federal Reserve and a weaker US dollar have driven the inflow of funds. Despite emerging economies cutting rates in line with the Federal Reserve, the rate cuts are expected to be smaller, with South Korea expected to cut rates by only 75 basis points
According to the latest information from the Zhitong Finance and Economics APP, the five largest emerging bond markets in Asia have seen net inflows of funds for the first time in three years, indicating that investors are becoming more optimistic about this asset class.
Compiled data shows that since early July, overseas funds have increased their holdings of debt from South Korea, Thailand, Indonesia, India, and Malaysia. If the fund inflows continue until the end of September, this will be a quarterly situation that has not been seen since mid-2021.
Charlie Robertson, Head of Macro Strategy at FIM Partners, said, "Many global investors would have originally reduced their holdings of low-yield Asian bonds, but once the Fed's rate cuts become more certain, they have to reduce their reductions. The weakness of the US dollar has also reopened the prospect of rate cuts in the region."
The significant inflow of funds indicates that as the Fed approaches rate cuts, investors are becoming more positive towards emerging market debt as a whole. This is in stark contrast to the poor performance of developing country bonds during periods of high long-term borrowing costs in the United States.
Although many emerging economies in Asia are expected to cut rates along with the Fed, it is expected that their easing magnitude will be smaller than that of the United States. For example, the swap market shows that investors expect the Fed to cut rates by about 200 basis points by the end of 2025, but at the same time, South Korea is expected to cut rates by only about 75 basis points